What Is A Medical Expense Personal Loan?

Did you know in 1960, the average annual cost of health care per person in the United States was just $147? ? Compare this to 2018: The Peter G. Peterson Foundation said that the average cost per person for health care in the United States soared to more than $11,000 that year.

There are many reasons why health care is so expensive in 2020: inflation, rising rates of diseases such as obesity and diabetes, and changes in government regulation. For consumers in America today, there will always be questions as to "why" health care is so expensive. but mostly, we wonder how we’ll pay for it should the need arise.

A medical expense personal loan can be a way to finance rocketing health care costs, but it’s important to weigh the personal pros and cons when evaluating this specific type of financing.

When we say "medical loan," we’re referring to a use-case for a standard personal loan (that you could use for debt consolidation, wedding costs or home repairs) for medical purposes.

Because funds from a medical loan are delivered in one lump sum, medical loans could be just the ticket when financing expensive procedures not typically covered by insurance; think cosmetic procedures, physical therapy, fertility treatments and egg freezing. A medical loan can also be used to pay off or consolidate existing medical debt from an unexpected lab test, emergency room visit or ambulance ride.

Medical loans can also cover living costs while being a caretaker to a sick child, spouse or aging parent. Even if a health crisis doesn’t lead to debt, many often do not consider the loss of income associated with illness and how to pay expenses during this time.

Medical loans function in the same way as any personal loan. First, you apply, then go through underwriting and approval with the lender, and once approved, the lender puts the funds into your desired account. Consumers can then use the lump sum to pay off their medical bills and pay the loan back in set installments over the agreed-upon term of the loan.

Finding – and qualifying – for a medical loan follows the same process as applying for any other type of financing. To qualify for a personal loan for medical costs you’ll need:

1. A good or very good credit score (typically 670 and above)
2. A debt-to-income ratio below 36%
3. A steady income (with W2s and tax returns to provide proof of income)

Your ability to obtain a medical loan depends on the health of your overall financial picture. As with all financing, the better your credit score, the lower the interest rate you’ll receive. Most personal loans are unsecured, meaning you won’t need any type of collateral to qualify for financing.

Because interest rates can vary widely among financial institutions, it is important to interest rate shop for medical loans in the same way you’d shop for rates for a home or auto loan. This way, you’ll be sure to snag the best rate available to you.

If you have a low or thin credit profile or simply want a more competitive interest rate, securing the debt with a piece of collateral or a co-signer can help.

Annual Percentage Rates (APR)

Before taking out any loan, be sure to research its annual percentage rate. This percentage reflects the yearly cost of borrowing money from a lender.

The annual percentage rate (APR) is a better indicator of the cost of a loan than its interest rate alone. That's because APR includes both the loan's interest rate and any fees charged by a lender. The lower the APR, the less it costs to borrow money. A loan with an APR of 11% is more expensive than one with an APR of 9%.

Fixed Or Variable Rates

Your medical personal loan can come with two types of interest rates. A fixed rate remains the same throughout the life of the loan. If your loan comes with an interest rate of 8% when you first take it out, it will remain at 8% all the way until you pay it off.

Or, your loan might instead come with a variable rate. This type of interest rate fluctuates during the life of your loan. You might start out with an interest rate of 8% for 2 years only to see this rate rise to 11% starting in in the third year. Make sure you understand exactly what type of rate comes with your loan.

Origination Fee

Some lenders charge origination fees to draft your loan. These fees will vary, but typically run from 1% to 5% of your loan amount. You might pay this fee in a lump sum at closing, while other lenders will roll their origination fee into your loan balance, meaning that your monthly payment will be slightly higher. Be sure to shop around when taking out a medical personal loan; some lenders charge no origination fees.

Loan Term

The term of your loan is how long it will take you to pay it back. Say you take out a 5-year medical loan. You’ll make 60 regular payments – 12 a year for 5 years – until you pay off the loan.

If you need medical care and are worried about being able to pay for it, a medical loan can help. Instead of skipping a medical procedure, you can spread out the cost of this treatment over a certain number of years, leaving you with a monthly payment that fits within your budget.

A medical loan can also be a good alternative to putting medical costs on your credit card. The interest rates attached to credit cards are usually higher than they are with medical loans.

Cons Of Medical Loans

The biggest drawback to obtaining a medical expense personal loan is that it may not be your best, lowest-cost way to finance medical costs. Before considering a medical loan, consumers should first reach out to their health care provider.

Many practices and clinics offer in-house financing directly, often at a lower interest rate than personal loans. A study from SingleCare found that of survey respondents in medical debt, 53% worked out a flexible payment plan with a provider.

A medical loan will also add to your monthly expenses. If your household budget is already stretched thin, adding a new monthly payment will only add to your burden.

Pros Of Medical Loans

Medical loans allow you to spread out the cost of covering your medical care. And these loans typically come with lower interest rates than do credit cards.

Approvals are typically quick on medical loans, too. This means it won’t take long for you to get the money you need to pay for your medical care.

Recent research from the Commonwealth Fund estimates 72 million people are struggling with some type of medical debt. For those Americans with less-flexible payment options, medical loans could be the best repayment option, and a way to avoid the medical bankruptcy that 535,000 families declare each year.

In the same Commonwealth Fund study, many consumers used traditional methods to get a handle on medical debt, such as taking on a second job or side hustle, low-interest loans from family members, or using emergency savings. While these avenues should be explored, often the nature of an unexpected illness or a medical emergency makes working extra nearly impossible.

Consolidating debt to a lower interest rate is always a good idea, provided the difference in interest rates is substantial enough to yield significant financial gains like lower monthly payments and an accelerated payoff timeline.

In general, consider a medical loan if you’ve exhausted all other low-cost or zero-interest financing options and need a way to get out from under high-interest medical debt or finance living costs during your recovery.

1. Payment Plan

Many medical providers offer their own payment plans in which you’ll pay off your medical costs over time, usually with regular monthly payments. These payment plans operate a lot like medical loans. But they might come with better rates and terms. Be sure to ask your medical providers if they offer such financing.

2. Medical Credit Card

Some medical providers might offer medical credit cards. These cards allow you to charge certain medical expenses. Do your research, though. Some cards don’t allow you to charge all medical costs. You’ll also have to research interest rates: Some medical credit cards offer deferred interest, which means you won’t have to pay interest if you pay off what you owe by a certain deadline. But if you fail to pay your balance on time, you might get hit with a big interest payment.

3. 0% APR Credit Cards

Some credit cards offer new customers 0% interest for a certain number of months, often 12 to 18. If you open one of these accounts, you can charge your medical bills and not pay any interest on them as long as you pay them off before the 0% period ends. Remember, if you don’t pay off your charges before then, your card’s standard interest rate will be applied to your remaining balance.

If you're struggling when it comes to paying medical bills, then a medical expense personal loan might work well to help afford the care you need. To stay on track, learn about managing debt, making smart financial decisions, your loan options and more on our Learning Center.