Medical Loans Basics: Should You Get a Medical Loan?

people reviewing medical bills and looking into medical loans
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Medical debt is a major problem in the United States. With rising costs of health care and the many ways health insurance restricts full coverage, many people have no choice but to borrow money to pay for certain procedures or types of health care. In fact, a 2019 study published in the Journal of General Internal Medicine reported that 56% of adults (137.1 million) have problems paying their medical bills.

If you're trying to avoid medical debt, looking for options you can afford is one way. There are social welfare programs, discount clinics, and methods to help you save money on health insurance, but for certain types of care or treatment, these options might not be enough. It may be worth looking into medical loans instead. If you're thinking of taking this route, here's how to get one and how they work.

What Is a Medical Loan?

A medical loan is a type of personal loan that can be taken out to finance a wide range of health care needs. These may include medical procedures, medical debt reconciliations, optional surgical procedures, out-of-network charges, or other costs related to health care that are not covered by your standard health plan.

What Are the Advantages of Getting a Medical Loan?

According to a 2019 study published in the American Journal of Public Health, 58.5% of people who went bankrupt "very much agree" or "somewhat agree" that medical expenses played a large role in their debt load. Taking out a medical loan that allows you to manage your health care costs on a payment schedule can be a major step in helping you pay for your health care needs, but it can also help you avoid the stress of worrying about collections or struggling to pay off massive bills in one shot. 

Here are just a few of the ways taking out a medical loan might work in your favor:

  • You may be able to get the funds much faster than if you waited for your health care plan to decide whether something is covered or not.
  • With an unsecured medical loan, you do not always need to have collateral.
  • A loan that is taken out for medical reasons may avoid having any bad effects on the credit utilization ratio on your credit report.
  • Medical loans may, in some cases, offer you better finance options and rates than getting direct financing through the service provider.
  • You can often use money from your medical loan to cover other related expenses (such as the extra costs of living during your recovery and treatment).

What Can Medical Loans Can Help With?

Medical loans can be used to cover a wide range of health care costs that may not be fully covered by standard insurance plans. Here are some common medical procedures and situations that getting such a loan may be able to help you with:

  1. Cosmetic surgery
  2. Fertility treatments
  3. Orthodontics
  4. Treatments or surgery related to weight-loss
  5. Consolidating medical debt

Some people may also opt for a medical loan when they are not sure if their health insurance plan will cover (or fully cover) a procedure. For example, some health plans may not fully cover plastic surgery, so a medical loan may be an option. Other times you may want to obtain treatment for something that is not deemed "medically necessary" by your insurance, and this may cause you to have to cover the costs, in part or in full, of the tests or treatment on your own.

How Do Medical Loans Work?

Medical loans are offered by a large number of private lenders. The process to apply is much like that of applying for any type of credit, except that the lender may be more flexible when looking at your credit score or former credit history than they would be with other types of loans. The precise factors will vary by lender. One major downside of medical loans is that they tend to have high-interest rates.

Before you choose a medical loan, be sure to look into payment plans or medical credit cards. You may be able to find a lower interest rate or better credit terms by shopping around.

Questions to Ask to Help You Compare Medical Loans

What Is the Annual Percentage Rate (APR)?

In the same way, the interest in a savings account can help you grow your savings faster, the interest rate on a loan can affect how much you'll have to pay monthly, and may also impact your ability to pay off your loan. A very low-interest rate may be in the 5-6% range, but many medical loans have interest rates in the ballpark of 20%-30%. If you have a very high-interest rate, it will take much longer to pay down your debt. This is especially true if your payments are small and the loan term is a long one. 

Will Interest Be Charged Right Away?

Some loans offer a grace period where you will not have to pay interest. The Patient Advocate Foundation cites that some plans may allow you a grace period of up to 18 months before you start to pay interest.

Are There Any Fees or Origination Costs?

Origination costs are one-time charges that the lender may charge to process the loan. The charge can be a few hundred dollars (or more) and will depend on the value of the loan. It will be a percentage of the loan value. The origination cost is often taken straight out of the loan but is included in the APR. So for example, if you take a $5,000 loan and the origination charge is $200, you will only get $4,800, not the full $5,000 (even though your loan was for $5,000).

Find out if your loan will have origination charges, what percent it will be, and how it works. In some cases, you may want to borrow more to offset a shortage in loaned funds due to this fee.

How Is Interest Calculated?

As with most loans, the interest rate on a medical loan can be either variable or fixed.

  • Variable: A variable interest rate is when the interest changes over the term of the loan. This can have an impact on your payment schedule, monthly payments, and how long it takes to repay the loan.
  • Fixed: A fixed interest rate stays the same over the life of the loan. This method will allow you to pinpoint how much your loan is going to cost you over the given term because your rate is locked in. It will also allow you to manage your budget since you will always know what your loan payments will be; they will not vary from one month to the next.

How Long Will It Take You to Repay?

The longer the term of your loan, the smaller your payments may be. But keep in mind that the interest rate may make a loan with a longer-term more expensive to pay.

Be sure to spend some time looking into your options and find a medical loan that works best with your budget, so you can better manage debt on your terms.