Dealing with a significant expense or an unexpected one can be taxing individually. It's considerably more difficult when both circumstances arise simultaneously. If you require money to cover the cost, you're likely considering personal loans.
TL;DR
- Generally, avoid personal loans for medical bills due to better hospital payment plans.
- Personal loans can consolidate multiple medical bills, potentially lowering monthly payments.
- Consider personal loans for non-bill expenses like travel or childcare related to care.
- Alternatives include hospital payment plans, low-APR credit cards, and home equity loans.
However, if your urgent expense is health-related, what then? Is a personal loan the right choice for covering medical costs, or are there superior alternatives?
Generally, you shouldn't use a personal loan for medical bills. We'll explore why this is usually a poor choice and the infrequent situations where it might be justifiable.
What is a medical loan?
You've likely encountered the phrase “medical loan” when discussing hospital expenses. But what precisely constitutes a medical loan?
Essentially, a medical loan is a personal loan. The phrase “medical loan” is merely a marketing strategy targeting individuals seeking to settle medical debts. It offers no unique medical advantages when used for hospital expenses, prescriptions, and so forth.
Personal loans offer flexibility for various needs, such as home improvements, consolidating debt, or covering medical bills. However, while you might be able to use one to pay your healthcare provider, it's not always the best course of action.
Is a personal loan a good option for covering medical expenses?
Taking out a personal loan for this purpose is generally ill-advised. Hospitals frequently offer their own payment arrangements, which function similarly to loans and often feature significantly lower interest rates than personal loans. Furthermore, a personal loan might not fully cover the cost of a very expensive medical procedure, as these loans usually have a maximum limit of $100,000.
Beyond not transforming your medical debt into personal debt via a loan, further benefits exist. Medical debt offers more leniency compared to personal debt in several respects:
- After your medical debt goes unpaid, credit bureaus provide a full year, or 365 days, to settle the amount before it negatively impacts your credit standing.
- Once paid, any overdue medical debt will be erased from your credit report, unlike a delinquent personal loan which remains for seven years.
- Certain states prohibit medical debt from appearing on credit reports. In these locations, lenders are unable to factor medical debt into their lending decisions.
However, in certain situations, it might prove to be a reasonable approach, provided it's undertaken with practical and thorough preparation. Let's explore this further.
You're looking to combine several outstanding medical bills.
Opting for a personal loan will very likely lead to greater interest expenses compared to utilizing the hospital's payment arrangement. However, what if the sum of your various minimum payments creates monthly expenses beyond your means? Consolidating these multiple minimum payments with a personal loan could possibly yield reduced monthly outlays.
Imagine a scenario where you owe $15,000 for hospital expenses and have a 24-month repayment period with no interest (0% APR). We calculate this would result in approximately $416 due each month. However, if you secured a $15,000 personal loan with a 60-month repayment schedule and a 10% APR, your projected monthly cost would decrease to roughly $318.
In the scenario described, settling the loan would require significantly more time, and you'd incur thousands in interest charges, yet the monthly payment would be more easily handled.
Combining various debts could also be attractive for individuals struggling to manage minimum payments and deadlines from different healthcare providers, such as pharmacies or specialists. Keeping track of all these invoices demands considerable mental effort.
You require funds for healthcare-related costs
Not every expense associated with receiving medical care will be eligible for a payment arrangement with a hospital or physician's practice. You might also encounter associated expenditures not invoiced by the healthcare entity, for which a personal loan could be a suitable option, including costs for travel and accommodation to access specialized care, child supervision, and peer support gatherings, among others.
Advantages and disadvantages of employing a personal loan for medical expenses
Pros
- Consolidate multiple medical bills
- Can cover more health expenses than just medical procedures
- Get money you need quickly
Cons
- APR may be higher than what’s charged by the health care provider
- Personal loans may not cover exceptionally high balances
- Delinquency will stay on your credit report longer
Ways to handle medical bills besides taking out a personal loan
Beyond tactics such as negotiating bills, employing a medical billing advocate, or seeking aid from regional and governmental initiatives, you have several options besides taking out a personal loan for medical expenses.
Payment plan
Arranging a payment plan directly with the hospital is probably your most economical and straightforward method for settling medical bills. This approach also allows you to utilize funds from Your Health Savings Account (HSA) for repayment. Should you opt for a personal loan to clear your medical debt, you won't be able to use your HSA to cover that loan, as it would no longer qualify as a medical expense. Furthermore, withdrawals from an HSA not applied to qualified expenses are subject to a 20% tax penalty by the IRS.
Low-APR credit card
Opting for the appropriate credit card could prove to be a more economical method for managing your medical expenses compared to a personal loan.
Many credit cards provide a 0% introductory APR for purchases, lasting a year or even close to two. If you possess the good to excellent credit usually required for these cards, and the purchase amount is within your approved credit limit, you can completely sidestep interest fees. After the introductory phase concludes, any outstanding balance on the card will start accumulating interest at its standard APR.
For this to be effective, you'll need to be strict with your payments, recognizing that the minimum monthly amount probably won't cover the entire balance during the 0% interest phase. Calculate the exact amount required to eliminate the debt before the introductory period ends, and commit to paying at least that sum consistently.
There also exist medical credit cards, advertising low intro APRs for those who need treatment now but can’t afford it. But there’s an enormous (and insidious) difference: Medical credit cards generally charge “deferred interest.” This means that you’ll pay no interest if you fully repay your balance before the interest-free window ends. But if even a red cent left of your debt remains, you’ll be retroactively charged interest for the entire interest-free period.
For this reason, we recommend staying away from medical credit cards if you can help it.
Home equity loan
If your home has accumulated significant equity, you might opt for a home equity loan to cover your medical expenses rather than a personal loan. This could allow for a larger borrowing sum and generally offers more adaptable repayment schedules, with home equity loans potentially extending for as long as 30 years.
However, there are drawbacks. You might incur extra charges not associated with personal loans, such as appraisal and title search fees, and receiving your money could be delayed. Furthermore, your home serves as security, meaning you risk losing it if you fail to repay the loan.
The takeaway
Healthcare facilities typically propose establishing a payment arrangement for those unable to settle the full amount at once. These plans usually feature minimal or no interest, often making them a more advantageous choice compared to a personal loan.
If your monthly medical expenses are excessive, you might be able to reduce your minimum payment by taking out a personal loan with an extended repayment period. However, keep in mind that you'll incur interest charges.
Frequently asked questions
A medical loan is a type of financing designed to cover healthcare expenses, and it functions by providing funds that can be used for various medical needs.
A medical loan functions like a typical personal loan, but it's specifically aimed at individuals needing to settle medical bills. Essentially, there's no fundamental difference between a medical loan and another type of loan, such as a debt consolidation loan, other than its intended purpose for medical expenses.
Medical loans can be used for a variety of healthcare costs.
A medical loan can finance nearly any healthcare cost. Essentially, it's a straightforward personal loan that you're free to use as you see fit, provided the transaction is lawful.
When considering how to pay for medical expenses, it's worth asking if a personal loan is a superior option compared to a credit card.
When considering medical bills, a personal loan might be preferable to using credit cards because personal loans typically feature significantly lower interest rates. Furthermore, installment loans do not impact your credit utilization, thus minimizing the potential negative effect on your credit score. Nevertheless, a credit card with a 0% introductory APR could prove more cost-effective if you can fully repay the balance before the interest-free period expires.
Is it possible to negotiate medical bills prior to securing a loan?
You might be able to negotiate medical expenses prior to securing a loan. Certain providers might even provide a substantial reduction if you settle your bill completely right away. This could potentially decrease your outstanding balance by hundreds or even thousands of dollars.
Could obtaining a medical loan negatively impact your credit score?
Obtaining a medical loan will cause a minor dip in your credit score due to a hard credit inquiry. However, with responsible credit management, your credit score should recover relatively quickly.