As a veterinarian or orthodontist, you may be ready to get a bank loan. Maybe you are buying your first house after graduate school, or you’ve found the perfect practice and want to get started on your own. Either way, your high student loan debt is going to affect your ability to get a bank loan.
Student loans affect your creditworthiness, either for good or for bad. Yes, you can use the word “good” in a sentence with student loan debt! And, being a professional in a medical service means you’ll have higher student loan debt than most graduates. However, there are ways to manage your debt so that you can still qualify for a bank loan, and succeed at balancing all your bills.
In this article, you’ll learn about how student loans debt affects creditworthiness, how your high student loan debt can be a force for good in getting a bank loan, and how you can manage your debt to succeed.
Did you know that paying back your student loans is a credit builder? Protecting your ability to pay back your student loans – even in the event of a disability or illness – is crucial to protecting your dreams of running your own business or owning a home. Contact Loyall Group today to ask about student loan riders on disability insurance. They are a guarantee that your finances stay healthy, even when you can’t.
What Banks Look For When Lending Money
Just like you manage risk in your practice each day, banks are looking at risk when they assess a potential loan. They are asking the question “How likely is this individual to pay back their loan?” According to this article by Small Business Chronicle, a bank will look at the “Five C’s” when lending money:
Character
Who you are as a person, your trustworthiness, honesty, and business knowledge.
Capacity
How much liquidity you have as a business to keep operating, and your ability to manage cash flow to control costs.
Commitment
You are personally responsible with your own input of cash into the business, or a down payment amount on a house. The loan purchase aligns with other lifestyle choices such as staying close to work.
Collateral
In a business loan, you’ll be asked to provide assets, like a building, that the bank can seize in the event you can’t repay your loan. In a home purchase, your home is the collateral.
Conditions
The current market will affect your bank loan. Sustainable economic conditions and the need for your services will affect a bank loan. For a home purchase, current average interest rates or taxes on the home you want to buy will be included in the considerations.
The most important aspect that a bank will look at is your creditworthiness. Have you paid your current debt obligations on time and consistently? What is your credit history? What current debt do you have to pay, and will your income support additional debt? These are questions that the bank will be asking. Next we’ll see how your student loan debt answers some of these questions.
Even after you’ve secured your bank loan for opening a practice, you’ll be given a list of required insurance policies to provide in order to get the loan amount. Make sure you know how to satisfy the practice loan requirements. Contact Loyall Group today for a 15-minute phone call, and we will begin creating calm out of chaos so you can pursue your dream.
The Downsides to Student Loans: High Debt-to-Income Ratio
We’ll start with the bad news first. Student loans often give professionals a high debt-to-income ratio (DTI). Especially for those in medical professions, who often graduate with two to three times as much debt to their yearly income.
An article published in the American Journal of Pharmaceutical Education shows that debt doesn’t stop growing once an orthodontist or veterinarian stopped going to school. Interest on high amounts of student loan debt keeps it ballooning even when a person has stopped taking on more loans.
This creates a burden, and if a graduate stops paying their student loan amount, it can negatively affect their creditworthiness. Defaulted loans typically stay on a credit report for 5-7 years. When banks look at a high DTI and a credit report with defaulted loans, they are likely to refuse a new loan.
However, there is hope to get your finances, even with a high amount of student loan debt, back into a manageable position to get the bank loan you need.
The Upside to Student Loans: An Opportunity to Build Creditworthiness
Student loans offer an opportunity to show that you are a person who can manage a bank loan. If you commit to paying back your student loans each month, you’ll build creditworthiness. This will show banks that you have the character and commitment to pay a new loan.
If you are planning on buying a practice or a home, you’ll want to manage your credit score to show sound financial management. Since 35% of your score is based on payment history, one of the most important things you can do is pay back your student loans each month.
Having a high amount of student loans may also be an upside. If you are paying them back each month, you can show a bank that you are able to manage high amounts of debt responsibly. As this article from CNBC shows, as long as you make the monthly payments, student loans shouldn’t negatively affect your credit report. And that will make you seem more attractive to prospective banks when applying for a new loan.
Practice Loans are Designed to Give You an Investment into Making Money
Finally, if you are applying for a bank loan to open a practice, consider that your loan is a key step to your ability to make an income. This article by Live Oak Bank shows that when you start your own practice, you have the ability to make more money than working within an established practice. You’ll usually get into a higher income market, choose how much to work, and manage costs to provide a good profit.
Additionally, while student loan debt is a consumer debt, like credit card debt or a house purchase, a bank loan to open a practice isn’t. Instead, it’s an investment into making an income. An article by the American Dental Association shows that because a practice generates income, having student loans doesn’t preclude you from obtaining a bank loan to start one. Instead, student loans could be seen by the bank as your commitment and character in investing in an education necessary to make the income.
Use an Income Based Repayment Plan to Leverage Your Income
You still need a way to manage your student loan debt to make the payments each month. That way, you’ll be able to build your creditworthiness for the new loan. One of the best ways to get a manageable monthly payment is to use an Income Based Repayment Plan (ICBR) [link to “Income Based Repayment Plan for Orthodontists/Veterinarians – Loyall Blog post coming] When you qualify for an ICBR, you’ll also qualify for forgiveness after 20-25 years.
Talking with an experienced student loan advisor is the best way to forge a path ahead with an ICBR. When you contact Loyall Group today, we’ll connect you with a nationally recognized affiliate, who can counsel you on the best way to get your student loans manageable. And, after you’ve secured your new bank loan, contact us to get clarity on the insurance policies required to satisfy the requirements. We’ll handle the stressful stuff, so you can focus on the things that matter the most: your dreams, your family, your life.