In a previous post, I gave you three ground rules to be aware of to be sure you get the best dental practice loan. I’ve also counseled that most dentists buying their dental practice should shop the loan, but usually with just two of the right banks.
If you understand the rules of the game and follow that process, when you’re ready to buy your practice you’ll have two loan proposals in your hand.
How do you know which one is the best?
Most dental practice buyers aren’t loan ninjas so they compare on the only reasonable thing that makes sense: the rate.
If one bank has offered a loan at 5% and the second bank is offering 4.99%, then the second bank has the clearly superior offer. Right?
Not so fast.
Rate is Important, but Matters Less Than You Think
If you do the math, you’ll learn rate is definitely important but less important than you may think. Rate is certainly not the only criteria you should use to make your decision.
Let’s look at an example.
Let’s say, for easy math, a doctor is borrowing exactly $1,000,000 to fund their practice purchase. And let’s say two lenders have made loan proposals. Bank A is offering a rate of 4.99% and Bank B is offering 4.79%.
Bank B is offering a better rate, no doubt. But how much better in real dollars?
Let’s look at the difference in the monthly payments first. If you assume a 10-year payback term, payments on Bank A’s loan will be $10,602. Bank B’s payment is $10,504.
That’s a difference of $98 per month. Or, 0.0093% of the total loan payment. Not the kind of money that is going to make or break your practice.
Don’t get me wrong, all other things being equal I’d prefer the $98 in my pocket instead of the banks’…but all other things are never equal on practice loans.
Payments are one thing, but what about total interest payments? If a buyer paid the minimum monthly payment for all 120 months, the total interest she would have paid over the life of Bank A’s loan would be $272,200. Total interest paid on Bank B’s loan would be $260,504. A difference of $11,695.
That’s real money, to be sure, but remember that’s interest the bank only gets spread out over 10 years (while constantly being eroded by inflation along the way). And it’s on a million-dollar loan.
Seeing the math on the difference in interest rates makes a lot of buyers say, “What you’re telling me is, there is more to it than just the interest rate?”
I counsel my clients to weigh the rate at about 50% of the total decision. It’s important and there are real dollars at stake, but banks are smart. And they know if they can get you to focus solely on rate, you might miss other aspects of the loan that have real dollars attached to them.
So what makes up the other 50% of your decision? The second biggest aspect to consider beyond rate is fees.
I’ll cover comparing fees in my next post and a few tricks to watch for.
Let me know if you need help comparing two loans or talking to the right banker! Send a note to firstname.lastname@example.org and I’ll respond directly! I’m happy to do what I can to help.
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