Medical expenses push many thousands of ailing or injured Americans and their families into serious debt each year. According to TransUnion, 68% of patients with medical bills totaling $500 or less failed to pay off the balance in full in 2017. That figure could rise as high as 95% by 2020, TransUnion forecasted.
Short of struggling to keep up with provider bills until bankruptcy becomes inevitable, can the typical patient do anything to fight back?
Medical debt is one of the most common reasons to get a personal loan, but it’s not appropriate for every potential borrower. Read on to learn how medical loans work, if it’s the right option for you, and some alternatives.
How Medical Loans Work
Practically speaking, a personal loan you take out to defray medical costs is no different from a personal loan you take out for any other legitimate purpose, such as debt consolidation or home improvement financing.
Rates and terms generally don’t vary by loan purpose, and most personal loans are unsecured, though borrowers with fair or impaired credit (FICO scores below 600 to 620) may benefit from secured loans that require collateral. Unlike personal lines of credit, which have more flexible terms and payment requirements, personal loans are installment loans with a fixed monthly payment and term. In most cases, making additional principal payments on a personal loan – or repaying the entire balance in full – does not result in a prepayment penalty.
Medical Loan Rates & Terms
As a general rule, borrowers with good credit and low debt-to-income ratios (DTIs) enjoy lower rates and longer repayment terms than less financially secure borrowers. Within this framework, however, rates and terms vary considerably by lender. Some lenders lend only to borrowers with great credit, others cater to borrowers with impaired credit, and still others cater to a broad spectrum.
A well-qualified borrower with a low DTI and a minimum FICO score of 720 to 740 can expect to qualify for personal loans with:
- Origination fees under 2%, if any
- Rates below 12% APR (including any origination fee and subject to change with prevailing benchmark rates)
- Terms of five to seven years, and occasionally longer (subject to lender policy)
A borrower with good credit (a FICO score above 660 to 680) can expect to qualify for personal loans with:
- Origination fees under 4%, if any
- Rates below 15% APR (including any origination fee)
- Terms of three years, and perhaps five in some cases
Borrowers with fair or impaired credit (FICO scores under 660), high DTIs, or both must expect less attractive offers with higher fees, higher rates, and shorter terms.
Shopping Around for Medical Loans
No matter how strong your credit is, don’t accept your first loan offer, and don’t limit your medical loan search to a single lender. Time and patience permitting, source quotes from at least a half-dozen online lenders, plus traditional bank and credit union lenders in your area. You can also use aggregators like SoFi and Credible to compare multiple offers at once.
Most of the time, soliciting a conditional loan offer doesn’t hurt your credit score. With rare exceptions, lenders only conduct formal credit checks when borrowers accept the offered terms and consent to a check, which may temporarily lower their credit score. As long as you’ve been truthful during your initial inquiry and no negative information is unearthed in the underwriting process, such as an unusually high DTI, you should only have to consent to a single credit check on the most favorable offer you’ve received.
Evaluating Medical Loan Offers
Relatively small changes to the terms of a medical loan could affect your required monthly installment payment and total financing charge. Consider these examples for a hypothetical $10,000 loan principal:
- 8% APR: With a 36-month term, the monthly payment is $313.36, and interest charges total $1,281.09. With a 60-month term, the monthly payment is $202.76, and interest charges total $2,165.84.
- 11% APR: With a 36-month term, the monthly payment is $327.39, and interest charges total $1,785.94. With a 60-month term, the monthly payment is $217.42, and interest charges total $3,045.45.
- 14% APR: With a 36-month term, the monthly payment is $341.78, and interest charges total $2,303.95. With a 60-month term, the monthly payment is $232.68, and interest charges total $3,960.95.
- 17% APR: With a 36-month term, the monthly payment is $356.53, and interest charges total $2,834.98. With a 60-month term, the monthly payment is $248.53, and interest charges total $4,911.55.
Assuming their interest rates don’t change, shorter loan terms mean higher monthly payments and lower total interest charges. Longer loan terms mean lower monthly payments and higher total interest charges.
Which Expenses Are Medical Loans Best For?
Medical expenses may be discretionary (elective) or non-discretionary (non-elective).
Non-elective medical expenses are generally interventional or urgent, such as trauma surgery or radiation therapy for cancer, and are usually covered in part by health insurance. Elective medical expenses, such as cosmetic surgery to address the appearance of aging, may not be covered by insurance at all.
“Elective” does not necessarily mean “frivolous,” however. Procedures and treatments deemed “elective” by insurers may be medically necessary. It’s therefore incorrect to say that no patient should ever pursue elective treatments or procedures without the capacity to pay all expenses out of pocket. What is correct is that non-elective expenses often arise without any warning, meaning you don’t have the luxury of advance planning to pay for them.
How to Use a Personal Loan to Cover Medical Expenses
Consider using your medical loan’s funds in one or both of the following ways.
For Discrete Events & Short-Term Treatments: Upfront Payoff
Using a personal loan to pay off already-accrued medical debt in one fell swoop makes sense for patients looking to put discrete medical events behind them.
This process is a lot like using a personal loan to consolidate existing credit card debts. Once your loan is funded, you use the proceeds to pay off as many medical bills as funds allow, prioritizing the biggest bills first. Once your loan’s funding is gone, you focus on paying off the balance on time.
If you have health insurance, your ideal funding request should equal the sum of your health insurance policy’s deductible (assuming you’ll exceed it), any required coinsurance payments, and any other expected out-of-pocket payments not covered by insurance. If you don’t have health insurance, use third-party resources such as New Choice Health to estimate cumulative health care costs, and set your funding request accordingly.
The advantage of this strategy is its simplicity. Since you’ve already incurred the expenses you intend to pay off, and your insurer (if you have one) has already paid its portion, you know exactly what you’re responsible for paying and can adjust your loan application accordingly.
The disadvantages of this strategy hinge on the vagaries of the medical billing cycle and the uncertainty inherent in the personal loan application process.
Even a discrete medical event – say, a simple fibula fracture that doesn’t require surgery or overnight hospitalization – involves multiple payees. For example, there’s the emergency room team responsible for evaluating your initial presentation, the imagining group that collects and analyzes X-rays or MRIs of your broken leg, the outpatient orthopedist with whom you’re likely to follow up multiple times, the pharmacy dispensing any necessary prescriptions, and the vendor handling any required medical equipment, such as a walking boot or crutches.
Though the initial emergency room visit is likely to account for a big share of your injury’s total cost, months may elapse between that visit and your final appointment, and bills pile up incrementally in the meantime. Unless you can work out an arrangement with your providers (more on that below), you’ll likely need to pay bills incurred early on before your treatment is complete.
Moreover, there’s no guarantee that you’ll receive your full loan funding request, or even that your loan application will be approved at all. Without a backup plan – such as negotiating a payment plan with your provider or raiding your emergency savings – staking your repayment strategy on full, timely funding is highly risky.
For Longer-Duration Treatments & Illnesses: Paying Off Over Time
Patients facing chronic illnesses or long recoveries from injury can’t wait to settle their medical debts in one fell swoop. Multi-year courses of treatment may necessitate a loan application early on in the process, perhaps soon after diagnosis. Once funded, the borrower puts the proceeds toward bills as they come due, for as long as funds remain.
This strategy is ideal for borrowers with excellent credit who are likely to qualify for the longest loan terms and lowest rates. However, even at low interest rates, this strategy invariably involves higher total financing costs than one-and-done loans. Depending on the length and cost of treatment, multiple loans may be necessary. If you have sufficient equity – at least 15% – in your home, a low-interest, long-term home equity line of credit (HELOC) from Figure.com might make more sense (more on that below).
Advantages of Using a Personal Loan for Medical Expenses
Taking out a personal installment loan to defray medical expenses is not ideal, but it’s preferable to carrying high-interest credit card balances or defaulting on existing medical bills. If non-debt and lower-cost debt options don’t work for you, here’s why you might want to consider this route.
1. It May Forestall Default
Taking on new debt to settle an old debt – in this case, aging medical bills – is preferable to allowing that old debt to become seriously delinquent.
Medical providers aren’t as quick as credit card issuers or personal loan providers to report nonpayment to credit bureaus. Usually, that doesn’t happen until the debt is charged off and sent to collections, which typically takes 90 to 180 days from the original payment due date. But, once that collections account shows up on your credit report, the hit to your credit score is likely to be swift and severe, particularly if your credit report was previously blemish-free.
In other words: If you have the opportunity to trade a mushrooming debt load coming due imminently for one whose extended payoff you expect to be able to fit into your budget, you should take it.
2. You May Not Have to Choose Between Treatment & Solvency
Choosing between the real prospect of default and a long-term but manageable debt obligation is hard enough. Even worse is choosing between medically necessary treatments recommended by your care team and you or your family’s solvency.
In the long run, taking out a personal loan to cover medical expenses may well have serious ramifications for your personal or family finances, particularly if you’re unable to work for an extended period. In the near term, having liquid reserves on hand to pay for medical bills not covered by insurance can provide invaluable peace of mind at a stressful, emotionally draining time.
3. It May Be Cheaper Than Using a Credit Card
Unless you’re eligible for a 0% APR credit card promotion (see the “Alternatives” section for more on that) or a rock-bottom low regular APR card, charging medical bills to a credit card and carrying those balances from month to month is virtually guaranteed to cost more in the long run than taking out a personal loan. If you make only the minimum payments on cards used to carry medical balances, you’ll face years – and perhaps decades – of debt and may incur interest charges higher than the original cost of care.
To be clear, temporarily carrying medical credit card balances may be inevitable in a true emergency, but you should look for other sources of funding, including a lower-interest personal loan, as soon as you’re able to do so.
4. You May Not Need to Wait as Long for Funding
Intense competition among online lenders makes for a very borrower-friendly application process. It’s common for online-only lenders to fund loans in just one business day following approval, and sometimes even the same day. With no unanticipated underwriting delays, a diligent, well-qualified borrower might wait as little as two business days from initial inquiry to full funding.
By contrast, even the speediest credit card issuers take several business days to deliver physical cards to approved accountholders, assuming their online applications are approved on the spot. Secured credit products, such as HELOCs, may take even longer to disburse. If time is of the essence, a personal loan may be your best choice. If you have the luxury, you can supersede it with lower-cost debt later.
Disadvantages of Using a Personal Loan for Medical Expenses
Using a personal loan to cover medical expenses carries a host of risks. Here’s why you might want to think twice before you apply.
1. It Might Not Prevent the Financial Worst-Case Scenario
Even if your personal loan forestalls imminent default, the end result may still be the same. That’s especially true if your medical condition renders you temporarily or permanently unable to work or otherwise substantially replace your current income. Absent a full recovery that gets you back to work full-time, your personal loan could actually make matters worse by creating additional debt you must ultimately discharge in bankruptcy.
2. It May Adversely Affect Your Creditworthiness
Like any new credit account, your medical loan could hurt your creditworthiness and reduce your appeal to lenders.
The biggest threat to your credit score is the risk of missing a medical loan payment, especially if you’re unable to work for a time and don’t have an income backstop, such as long-term disability insurance. Missed payments reported to consumer credit bureaus remain on your credit report for seven years.
Adding a sizable new installment loan without a substantial income increase is also certain to raise your debt-to-income ratio, further eroding your appeal to lenders. Once your DTI exceeds 50%, you’re far less likely to qualify for a subsequent personal loan; many lenders prefer to deal with borrowers whose DTIs are under 40%.
If you expect to make future credit applications – for example, if you plan to buy a house – DTI looms larger still. Most mortgage lenders cut applicants off at 43% DTI.
3. You Won’t Avoid Interest Charges
Borrowers have the option to repay balances charged to revolving credit lines, such as credit cards, before they accrue interest. That’s not the case for installment loans.
Once you make your first personal loan payment, you’ve paid some interest on the balance, even if you repay the remaining balance the following day – which is highly unlikely if you had to take on new debt to cover medical expenses. Every personal loan installment builds in principal and interest according to the loan’s amortization schedule.
4. You May Need to Put Up Collateral
Depending on the lender, your income, and other factors, if your FICO score is above 660 to 680, you likely won’t need to offer collateral against your medical loan.
If your credit isn’t so good, the chances are higher that you’ll be asked to put up a valuable asset, such as a vehicle title, to secure your loan. That is, unless you’re willing to accept uncomfortably high interest rates and origination fees, not to mention paltry borrowing limits, on any unsecured loan offers that lenders deign to throw your way.
Secured loans carry risks not present in unsecured loans – namely, loss of collateral. Perhaps you’re willing to give up your car to avoid bankruptcy, but if you’re unwilling to suffer such a loss, look for alternative financing methods.
5. You’ll Be Dealing With the Budgetary Impacts for Years
Your medical loan will carry a minimum term of two years; three is more likely. That means 36 months in which payments eat into your monthly budget. Assuming you qualify for the lowest-cost loan example above – $10,000 borrowed at 8% APR for 36 months – that’s 36 payments of $313.36 each.
On an after-tax income of $3,000 per month, that’s 10.4% of your income. Even at $6,000 per month after taxes, that’s more than 5% of your take-home income gone before you do anything. And that’s assuming you’re able to get back to work full-time and don’t incur any further medical expenses.
Alternatives to Personal Loans for Medical Expenses
Before applying for a medical loan, consider each of these alternatives. Those that do require you to incur new debt may come with lower total costs or more favorable borrowing terms than unsecured personal loans.
Depending on the total amount of your medical bills and your borrower profile, you may need to pursue one or more of these alternatives even if you’re able to qualify for a personal loan that partially offsets your expenses.
1. Start a Medical Savings Fund
Among all the types of savings you should have, a medical emergency fund is one of the most important.
If you have a high-deductible health plan through your employer, your spouse’s or parents’ employer, or a state or federal health insurance exchange, you may be eligible to contribute to a health savings account (HSA). Funds withdrawn from an HSA to cover qualifying medical expenses are not subject to federal income tax.
Individual HSA contributions are tax-deductible up to $3,450 annually; HSA contributions for family plans are deductible up to $6,900. Other eligibility requirements apply. For instance, you can’t be Medicare-eligible and HSA-eligible simultaneously.
If you don’t qualify for an HSA, and your employer doesn’t offer other health care-related financial support such as a Health Reimbursement Account (HRA), you can always set aside a non-tax-advantaged, FDIC-insured savings account to hold funds earmarked for future health care expenses. Open an account at your earliest convenience – checking our list of the best bank account promotions before you do – and set a recurring monthly or weekly contribution that fits your budget: $100 per month, $25 per week, or whatever works for you.
2. Deplete Your Existing Emergency Fund
If you’re fortunate enough to have a substantial emergency reserve in place, deplete it before raiding your long-term savings or tax-deferred accounts (HSAs excepted) or turning to unsecured credit products such as credit cards or personal loans. If you aren’t going to use your emergency fund to defray necessary medical expenses, then what’s it good for?
3. Shop Around for Better Health Insurance
It’s best to do this before your medical records reflect the condition that’s threatening your financial stability. The Affordable Care Act (Obamacare) prohibits insurers from denying coverage to patients with certain pre-existing conditions, including potentially ruinous chronic illnesses like cancer and diabetes, but insurers remain free to factor patients’ health profiles into premium calculations.
If you have access to employer-sponsored health coverage, review your plan options and consider upgrading to a more generous plan. If your employer doesn’t offer health coverage, go to HealthCare.gov or your state health insurance marketplace to review plan options available in your area. Or, if you have enough room in your schedule, look for a part-time job with health insurance benefits.
Unless you qualify for a special enrollment period due to job loss or other factors, you may need to wait until the next open window to change or adopt health insurance coverage. And remember that more generous plans – those with lower deductibles, copays, and coinsurance requirements – invariably carry higher monthly premiums. HealthCare.gov has a handy tool that lets you estimate your total annual cost of care based on your expected use of care.
4. Negotiate With Providers
Every provider is different, but many are happy to negotiate with patients and their advocates – particularly as an alternative to charging off a debt entirely. Depending on your personal circumstances and preferences, consider:
- Checking For and Flagging Billing Errors. Use price transparency resources like Healthcare Bluebook to flag potential billing errors or identify anomalously high health care service costs. If you find that a particular provider’s fees are consistently out of line with comparable providers nearby, it’s an opening to negotiate your bills downward. Money magazine has some great tips for patients and loved ones looking to negotiate directly with providers and save money on medical expenses.
- Working Out a Payment Plan. Even if your bills contain no egregious charges, there’s no harm in asking providers’ billing departments to accept payment on a schedule that works for your budget. Present a clear, actionable plan, such as, “I can pay off this bill for X amount in Y installments by Z date.”
- Applying for Income-Based Hardship or Financial Assistance. Any income-based hardship or financial assistance your provider offers is likely to be easier on your wallet than any payment plan you can negotiate on your own. The catch is that these programs are usually reserved for lower-income patients. You may need to apply for Medicaid before your provider even considers your request. Medicaid income thresholds vary by state but are generally close to the poverty line, which was $12,140 for individuals in 2017.
- Asking for a Prompt-Pay Discount. Some providers automatically apply prompt-pay discounts for payments made at the point of service – that is, before you leave the hospital or outpatient clinic. Typical discounts range from 10% to 20%. If it’s not clear whether a prompt-pay discount is available, it never hurts to ask billing staff directly. Use this strategy only for payments you’d make out of your HSA, emergency or other savings, or day-to-day cash flow, up to your insurance policy’s deductible. There’s no point paying out of pocket for expenses your insurer will cover anyway.
5. Use a Medical Credit Card
If your credit is good enough to qualify for an unsecured personal loan, you may also qualify for a medical credit card, a niche credit card specifically designed for out-of-pocket medical expenses.
Medical credit cards usually have generous 0% APR introductory promotions, up to 24 months for high-limit CareCredit products. However, interest may be retroactive, heavily penalizing cardholders who don’t pay off their balances in full during the promotion period. Regular APRs are high as well, often above 20%.
6. Tap a Secured Credit Line
If you or a family member have sufficient equity in a home, consider applying for a home equity line of credit (HELOC). Your HELOC’s interest rate is likely to be lower than your lowest approved unsecured personal loan rate, and you (or the primary borrower) may be eligible to deduct interest charges if you plan to itemize tax deductions – though you shouldn’t assume this is possible without first consulting a tax professional.
The major drawback to taking out a HELOC to defray medical costs is the invasive and time-consuming application process, which is made a bit less bearable by draw periods longer than the typical personal loan term.
For shorter-term expenses, a home equity loan is a viable option too. The application process is just as involved as a HELOC’s, but the lump-sum funding is ideal for zeroing out medical bills after treatment is complete.
A 401(k) loan could be even cheaper than a home equity product. If you or the family member taking responsibility for your bills have a well-funded 401(k), you can borrow up to $50,000 from the plan. Your limit will be the greater of $10,000 or 50% of your vested account balance. The borrower is still responsible for repaying any borrowed funds with interest, but the exercise is often a wash, and may even wind up netting a profit.
7. Take Advantage of a Regular Credit Card’s 0% APR Promotion
For well-qualified patients with FICO scores above 680 or 700 and relatively low medical debt loads, a mainstream credit card’s 0% APR introductory promotion may work better than a dedicated medical credit card.
Credit card issuers are careful with 0% APR promotions. In addition to strong credit, you’ll need a low debt-to-income ratio to qualify. The stronger your borrower profile, the higher your approved credit limit is likely to be. However, even if you’re approved for a generous credit limit, you’ll want to keep your overall credit utilization ratio under 50% – meaning a balance no higher than $5,000 on $10,000 of available credit.
The best 0% APR introductory promotions last 18 to 21 months, with rare exceptions. Read the fine print on your cardholder agreement to determine whether interest accrues retroactively. If so, you must pay off all charges before the promotion expires to avoid potentially catastrophic interest charges. Don’t make any charges that you’re not confident you can pay off in time.
The best way to avoid getting caught up in a ruinous cycle of debt is to front-load charges during the first month or two of the promotion, then focus on paying them down for the remainder. That’s easier for patients dealing with short-term illnesses or discrete emergencies than for patients grappling with long-term care costs.
According to a study published in the New England Journal of Medicine and summarized by Physicians for a National Health Program, hospitalization costs are responsible for about 4% of personal bankruptcies declared by non-elderly U.S. adults. A widely publicized – and widely criticized – 2011 study published in the Journal of Public Economics found that approximately 26% of personal bankruptcies in low-income households can be attributed to out-of-pocket medical expenses.
Even if the New England Journal of Medicine’s less sensational figure is closer to the truth, such medical bankruptcies aren’t the sole product of eye-popping hospital bills. Understanding the true financial cost of serious injuries and illnesses requires an expansive definition of “medical expenses” that encompasses not only direct care but also:
- Lost wages and lost employment (when the patient’s illness or recuperation period outlasts FMLA protections)
- Lost ability to work (when an injury or illness results in long-term or permanent disability)
- Tertiary costs (such as those arising from mobility-related modifications to the patient’s home)
It’s possible to recoup some of these costs through private long-term disability insurance and Social Security Disability (SSDI), among other potential options. And it may be easier than you realize. You can apply for Social Security Disability benefits online if you’re over age 18, have a condition that renders you unable to work for at least 12 months or is expected to result in death, aren’t currently receiving SSDI benefits, and haven’t been denied disability benefits within the past 60 days.
Have you ever used a personal loan to cover medical expenses? If you’re thinking about doing so, what other options are you considering?