(This is part 2 in a series of posts on how to compare dental practice loans. Read Part 1 “How to Compare Rates on Practice Loans” here.)
Roughly 50% of your decision on which bank to use for your practice loan should be made on the rate.
But don’t forget the fees. I recommend giving fees a 30% weighting on your overall decision of which bank to choose.
What to Expect with Practice Loan Fees
Many banks will tack on various fees to dental practice loans, always payable upfront and tacked onto the loan balance. A 1% fee used to be standard in the industry, with fees slowly coming down. Now, I’d estimate the median fee charged dental practice buyers to be a little under half a percent or 0.5%.
That fee percentage is calculated based on the total amount being borrowed. So, back to our example, if both Bank A & B were charging a 1% fee, that would be an additional $10,000 added to the balance of the loan. A 0.5% fee would be $5,000, and so on.
Should you expect to pay some fees?
Only if you don’t do it right.
How much do I recommend you pay in fees?
Zero. Zilch. Nada.
Most banks will waive the origination fees if pushed a little. I generally don’t like origination fees and always ask to have them removed.
There is one fee that is generally acceptable. Sometimes if the timing of the deal is such that you’re locking your loan down months ahead of the actual closing date, a bank will charge a “rate lock fee” of a few hundred bucks. This protects the bank in case the federal reserve unexpectedly changes interest rates or the bond market goes crazy. I have no problem with those fees. I think it’s worth a few hundred bucks to know with certainty what your loan rate will be months ahead of your actual closing date.
Why Banks Charge Fees
Why do banks charge fees in the first place? Aren’t they earning enough interest on the backs of you poor, hard-working, student-loan strapped dentists? Two reasons.
First, it’s one way banks get paid. Remember the interest (the other way they get paid) the bank gets is spread over time. Charging fees allow banks to collect some reward upfront for taking on the risk of loaning you money.
Second, I believe some banks charge fees because the borrowers get so fixated on rate, they don’t realize it’s a worse deal. They don’t realize they’re paying 1% in fees and getting a 0.1% lower rate and not coming out ahead. The banks are savvy. It’s marketing and psychology. Lowering the interest rate and raising the fees allows that doctor to brag on Facebook about their awesome, low rate while conveniently leaving out the fact they got gouged on fees.
Don’t be the doc who misses the fees and goes for rate only. Why not ask for both? Keep the good rate and ask to have the fees waived! It can’t hurt to ask.
I counsel my clients to think about fees as something like 30% of the total decision. That leaves 20% of the total decision for the last meaningful comparison point: process.
There are a number of pitfalls and hidden gems in the practice loan process that most dentists miss that I’ll cover in the next post.
In the meantime, if you need a referral to a bank that doesn’t charge fees email me directly at firstname.lastname@example.org.
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