Loan - $75000 - advice please

[Phoenixdown99]

Dear Forum,

I need some specific and general advice. I recently joined a practice that offered a 75K loan at a very low interest rate (around 2%). If I stay at the practice 5-7 years, I get to keep it and the interest is forgiven (25k each year starting at year #5). I decided to take the loan. I would like some advice about how to invest it so I can at least keep up with the 2% interest rate if possible. I do not need the money for a down payment and I do not have debt, but I do have a mortgage on a rental property (no PMI) that I am currently renting out. I also have an additional 100k or so saved in a bank account. My 401Ks are around 90k, and I currently have them in mostly bonds (unfortunately I freaked out after the election a bit, hoping to move them back to index funds soon but worried about the fact that the market is so high right now) I rent an apartment for 1.7k a month right now. I am hoping to find an investment that would allow me to immediately pay back the 75k if I need to leave the practice. I am single, in my early 30s and have no kids (though I plan to in the next 5 years), and make 300k with benefits.

Thanks in advance!

[RogueDadMD]

This just engenders a lot more questions for me.

I'm not familiar with the financial benefits offered to people in private practices, but a loan for what?  Is this meant to be their equivalent of a doctor loan to help you buy a house but to also tie you to the practice, as they'll assume you will spend the money and not be able to repay it?

Why do you want the loan if you are just going to let the money sit and appear worried you may leave before 5 years?  Do you view it as a sign-on bonus that you can't access for 5-7 years?

If you want something that's going to 100% preserve your 75k capital over a 5-year period that is immediately accessible for full-value, you're going to be stuck with high yield savings/MMA and maybe some bond funds.

However, you already have 100k in cash, so you can pay back that money tomorrow if you have it tied up in the stock market and then sell those off later when the timing works.  So putting it into a vehicle that is immediately accessible doesn't seem necessary.  However I am curious why you have 100k in cash and only 90k in retirement accounts and what your financial goals are, because I can't say I understand what you want to accomplish with the loan or the money you have on hand.

You make 300k a year and you are young with no financial obligations.  Get your 401k money into equities and forget about it for 20 years.  That amount of money feels likea lot because it's all you have in those accounts, but given your income and earning potential and years remaining, it's a drop in the bucket and is is losing opportunities to grow.

Stop trying to time the market -- it already backfired on once you when you moved into bonds after the election, and it will backfire on you again.

[G]

Why is your practice giving out large loans with low/no interest?  What is the benefit to withholding equity from the partners?

[The White Coat Investor]

Not sure I would be that excited about borrowing money at 2% (maybe 0% if things work out) and investing it in bonds yielding 2%.

You need a written investing plan that includes how you are going to invest and what you are going to do with this loan. Given your demonstrated risk tolerance, I'm not sure investing on margin is for you.

[G]

Rogue Dad, M.D. wrote:

I’m not familiar with the financial benefits offered to people in private practices, but a loan for what?  Is this meant to be their equivalent of a doctor loan to help you buy a house but to also tie you to the practice, as they’ll assume you will spend the money and not be able to repay it?

 

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Hm, that is an interesting idea.  It could backfire--what if it turns out that you don't want the doc tied to the practice!?

[hightower]

Give it back.  Take it from me, debt sucks.  Even low interest debt.  You don't need it, so just give it back and say "no thanks, I changed my mind."  It makes no sense to borrow 75000 just so you can keep it as essentially cash. If you had student loan debt at 6.8% or some sort of other bad debt, then it would be worthwhile, but you're already sitting on 100k of cash, why on earth would you need an additional 75k from a loan?

[Phoenixdown99]

Yes, the loan is basically to tie you to the practice from my understanding. A lot of people join right out of residency, too, so they have student loans etc. to pay off. There is a very good chance that I would stay at the practice long term (or at least 5 years) so I decided to take the risk of taking the loan. Also, the interest is not that bad in case I do decide to leave and I could take the hit.

I guess it does make sense to invest it into something other than bonds since I have the 100k -- but I was hoping to invest or use that as well. Not sure how at this point. Maybe a down payment in the next few years.

I only have 90k in retirement accounts because that was all that was allowed to contribute due to the 18,000$ cap in prior jobs. Most of the 100k came from doing locum tenens last year for a year. I contributed some to an independent 401K but had a limit per my tax adviser.

I'm definitely planning to get the 401K money into equities. Still a little paranoid given the timing and the political climate...

[Phoenixdown99]

Hightower -- The reason is that the loan turns into a gift if I stay at the practice long enough

[ajm184]

This seem less of a 'loan' and more like a deferred signing bonus/long term incentive compensation.  As you recently joined the practice, it is reasonable to me to keep the money (that you don't appear to need) in something liquid/bond like to potentially repay.  I would use the next year to evaluate your desire to stay in the practice long term and potential avenue(s) to becoming an equity partner in the practice.

Saw similar loan structures in the late 90's whereby a professional practice was setting up/guaranteeing loans made to its partners.  It is a highly risky loan structure for a practice in my opinion, though in this case the length of time (7 years) somewhat mitigates).

Agree with Rogue, attempting to time a 401k has to stop, otherwise your wasting your greatest asset: time and compounding.  Emotion is one of the worst traits in investing.  Determine an asset allocation/financial plan and execute against a plan.

[Dr. Mom]

Give the money back and push them to restructure it as a straight bonus of 25K in years 5, 6, and 7.  Less risky all around for everyone.  You could even offer to take less the first year to make up for the interest you wouldn't be paying them until then.

[AnotherSecondOpinion]

Personally, I wouldn't take out a loan to try to profit from it, especially since you're new and are unsure about how this will all pan out.  Even though 2% interest isn't high by loan standards, it'll eat into any profit you're trying to make from it by placing it into "safe" investments, the delta just wouldn't be high enough to mitigate the risk.

[jfoxcpacfp]

I think there may be some confusion (at least for me) - will you be forgiven only the 2% interest or the full amount over years 6 - 8? I believe that you are being offered a deferred bonus of $75k with interest at 2% if you decide not to stick it out. If that's the case, no way would I give up $75k. Reading between the lines, I have a concern about the quality of a practice that would be compelled to offer this kind of incentive, though. How long have they been together and how stable are the employee relationships?

To answer your original question, you already have $100k saved that you could tap into to pay back the loan if necessary. Go ahead and invest in an appropriately-diversified equity mutual fund portfolio and rebalance annually.

[Phoenixdown99]

I am sorry for the confusion. The full amount would be forgiven over years 5-7, as well as the interest. It is basically a deferred bonus, but it turns into a loan with interest you need to pay back immediately if you leave before year 5.

I cannot push them to restructure it as a straight bonus for later years because it is a company-wide policy.

I could tap into the 100K now, but I might use it in the next few years for a down payment on a house. So that is why I am thinking of more bonds for the 75K But maybe I'm wrong.

Several people suggested some kind of bond type investment...what would be the practical way to do that?

Thanks so much.

[hightower]

Okay, so it is a bit weird that they are doing it this way, but if you foresee staying there for the long haul and the loan is forgiven after 5 years, then, okay, I guess I would keep the dough.  I wouldn't invest it though.  Just in case the stock market crashes AND you decide you don't want to be there before 5 years.  I would put it in a 5 year "high interest" CD and leave it alone.  Ally has one at 2.25%. That's good enough for money that isn't technically yours yet.

[adventure]

Why on earth would you take a loan you don't need? I see no plans for its use, or use of existing funds, strong liquidity requirements, low benefit, and high emotional cost.

And to this, I'd say, you are correct if you believe that policies are set in stone. If you ask, they might change.

Phoenixdown99 wrote:

I cannot push them to restructure it as a straight bonus for later years because it is a company-wide policy.

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Viewed another way, if you manage to stay there for 7 years, you get ~10k/year. It only cost you a lot of headache, debt, risk, and low potential for any gain. Perhaps you could get ~10k/year with more flexibility, less stress, for a minimal amount of moonlighting, rent raising, cost cutting, or other consulting.