Medical debt is a major problem in the United States. With rising costs of health care and restrictions on health insurance coverage, many people have no choice but to borrow money to pay for medical care when it comes to certain procedures or situations. In fact, according to a 2019 study published in the Journal of General Internal Medicine reported 56% of adults (137.1 million) have problems paying medical bills. Looking for affordable options to save money on health care insurance coverage is one way to try and avoid medical debt, but for certain procedures, it is worth looking into medical loans. Here's how to get one and how they work.
What Is a Medical Loan?
Medical loans are personal loans that can be taken out to finance medical procedures, medical debt reconciliations, optional surgical procedures, out-of-network charges or other medically related costs that are not covered by your health insurance.
What Are the Advantages of a Medical Loan?
According to a 2019 study published in the American Journal of Public Health, 58.5% debtors "very much" or "somewhat agree" that medical expenses contributed to their bankruptcy. Taking 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 medical needs and avoid the stress of worrying about collections or struggling to pay off procedures in one shot.
Advantages of Taking Out a Medical Loan:
- You may be able to get the funds for your procedures much faster than if you waited for insurance to decide whether something is covered or not.
- Unsecured medical loans do not necessarily require you to have collateral.
- A medical loan may not impact the credit utilization ratio on your credit report.
- Medical loans may, in some circumstances, offer you better finance options and rates than financing through the medical service provider.
- Use money from your medical loan to cover other medically related expenses (for example additional living expenses during your recovery and treatment).
5 Situations Medical Loans Can Help With
Medical loans can be used to cover various medical costs that may not be fully covered by insurance. Here are some common medical procedures and situations medical loans might help with:
- Cosmetic surgery
- Fertility treatments
- Weight loss related surgery, for example, bariatric procedures
- Consolidating medical debt
Examples of a Medical Loan Uses
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 certain plastic surgery procedures, so a medical loan may be an option. Other times you may want to have a medical procedure for something that is not considered "medically necessary" by your insurance, and this may cause you to have to cover the full or partial costs of part of the tests or procedure yourself.
How Do Medical Loans Work?
Medical loans are offered by various lenders and the application process is similar to applying for any type of credit, except, depending on the lender, they may be more flexible in the credit score requirements, or previous credit history than others. The downside of medical loans is that they may have high interest rates. Before you choose a medical loan, be sure to look into payment plans or medical credit cards.
4 Tips to Compare Medical Loans
1. 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 make a huge difference in how much money you will pay monthly and how much it will cost you. It may also impact your ability to pay off your loan. A really low-interest rate may be as low as 5-6%, but many medical loans have interest rates in the ballpark of 20%-30%. When you have a very high interest rate, you will take much longer to pay down your debt, especially if your payments are small and the loan term is a long one.
2. Interest-Free Periods and Origination Costs
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.
Origination costs are one-time charges that the lender may charge for processing the loan. The charge can be a few hundred dollars (or more) and usually depends 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 APR calculations. 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 percentage 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 the origination fee.
3.Variable or Fixed Interest Rate
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.
A fixed interest rate will allow you to know exactly how much your loan is going to cost you over the given term because you have a locked-in interest rate and it will also allow you to manage your budget since you will always know what your loan payments will be; they will not vary.
4. Term of the Loan - 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 longer-term loan more expensive to pay.
Be sure and find out what your options are and find something that works best with your budget.