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Choosing the Best Loans for Your Dental Practice
Most people rely on interest rates to be their guide when comparing financing options. The rate is an important factor, but one which can actually lead you to make the wrong decision.
What’s critical is the total amount you pay for your lease or loan, because this is the true cost of ownership -- the monthly payments plus any security deposits or fees. And because there are differences in how companies illustrate interest rates, it’s in your best interest to compare payments rather than the interest rate.
To understand why the same interest rate may generate different results, it’s important to know the two basic ways finance companies calculate interest rates and collect payments: in arrears and in advance. These methods drastically affect your overall monthly payments. On a financial calculator, the terms are called End Mode (arrears) and Begin Mode (advance).
Consider the Following Example
A dentist is buying new equipment for the practice. The dentist wants a quote for $75,000.00 for a 60-month term and a final purchase option of $1.00 (finance lease).
Finance Company A offers an interest rate of 11.22%, while Finance Company B offers a rate of 10.95%. The payments are similar at $1,623.75 and $1,628.81 respectively.
The differences are in the details:
Finance Company A
- Bills and collects payments in advance.
- Collects a true first and last payment with signed documents.
Finance Company B
- Bills and collects payments in arrears.
- Collects a security deposit with signed documents -- usually equal to two times the monthly payment amount.
- Remember, this company collects payments in arrears, so the first true payment is not due for almost 30 days from signing. But they have to collect something up front, so they call it a deposit to make the interest rate look more attractive.
Which company would you finance with -- the better rate or the lower payment?
After some simple calculations, it’s clear that Finance Company A -- even with the higher rate -- is the better choice because your total payout savings is $3,561.22.
- Finance Company A has a total cost paid out that equals $97,425.00, at a monthly payment of $1,623.75 over 60 months.
- Finance Company B has a total cost paid out that equals $100,986.22, at a monthly payment of $1628.81 over 60 months, plus the deposit.
With Finance Company B, you receive a lower rate, but you actually just cost yourself an additional $303.60 in actual payments, plus a security deposit of $3,257.62, which gets taken out of your cash flow and is not guaranteed to be returned.
Another Example
A dentist is buying $50,000.00 worth of equipment and begins by calling companies for finance quotes based on 60 months with a $1.00 purchase option (finance lease). The dentist received two quotes of 11.22% interest. Who should the dentist choose?
Finance Company A quotes payments of $1,082.50 in advance, while Finance Company B quotes payments of $1,092.62 in arrears.
Both interest rates are the same, but one payment is higher due to when the payments are collected. Finance Company A actually saves the customer $607.20 -- plus any security deposit that may be collected by Company B -- over the term of the lease simply because the payment is lower.
Moral of the story: Don’t get caught up in interest rates. Rates are important, but not the only factor.
So, just what should you consider when comparing finance companies?
- Monthly payments
- Origination fees
- Terms and conditions
- Ease of understanding the document
- A company that shows strength, ethics, values and longevity in the marketplace
- Purchase option at term end: 10% option, $1.00 option and Fair Market Value option
- Customer support -- Do you get prompt replies from your financing company with live persons answering your questions and concerns?
Always request a quote in writing and ask to review the lease or loan documentation before committing.
Hopefully, after reading this article, you will not make the same assumption many dentists make about interest rates. You need to find out what you actually pay for the equipment.
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