By: Michael Wong
Disclosure: Michael Wong is a cofounder of Walnut. Walnut is a modern and ethical option for people looking to split their medical bill into affordable monthly payments. Find out more at hellowalnut.com
Regardless of health insurance status, millions of Americans find themselves on the hook for thousands of dollars in medical bills that they are unable to pay back. For people unable to cover expenses upfront, there are many options. In a previous post, we discuss the different medical financing options including medical credit cards (like Care Credit) and medical loans.
While we gave a high-level overview of these medical payment options, it may be beneficial to look into these a little closer. So where better to start our journey than with medical loans. In this post, we will give a complete guide to covering hospital bills and other medical expenses with medical loans.
What Is a Medical Loan?
Medical loans are, unfortunately, common. A survey from Gallup reported that in 2018, Americans borrowed $88 billion dollars to cover medical expenses. It was also reported that nearly 5 million Americans borrowed $5,000 or more.
So first off, what exactly is a medical loan? Well simply, it is a personal loan but used for medical expenses. Medical loans can pay for a variety of medical costs, like cosmetic surgery, IVF treatments and emergency procedures.
Most medical loans are unsecured. An unsecured loan is basically a loan that does not require a cosigner or collateral (such as putting up your house). In this instance, you don’t risk losing your home over medical debt or failure to pay. This is often recommended but comes with it’s limitations. Unsecured personal loans for medical bills are typically best suited for those with great credit scores, otherwise the interest rates may be extremely high.
If you don’t have the best credit, or you have had credit dings in the past such as bills that went to collections or bankruptcy, then you may have to apply for a secured loan. This type of loan requires collateral, which you will lose if you are unable to repay the loan. Because it is “secured” interest rates are often lower.
What Are The Benefits of a Medical Loan?
Medical loans may be a good alternative to those who want to avoid medical credit cards or depleting their emergency savings. Here are some benefits of medical loans:
Fixed interest: Unlike medical credit cards, interest rates are fixed and you’ll know the exact payment month-to-month.
Flexible loan terms: Most medical loans offer repayment term options that can range up to 60 months.This flexibility can allow for more affordable monthly payments and a more individualized payment plan.
Lower interest rates: Interest rates can be less than half of what you find with medical credit cards. Of course, having better credit or collateral does help in reducing and finding the best interest rates.
Flexible Use: Money used from personal loans are strictly limited to medical expenses. In addition, they can help pay for ancillary expenses that may have occurred due to treatment such as traveling or living expenses.
What Are The Drawbacks of a Medical Loan?
Medical loans are not the right choice for everyone. It is very important to look at both sides of the coin and see if medical loans are right for your particular situation. Let’s take a look at some of the biggest considerations:
High interest rates for low credit borrowers: The benefit of a low interest rate depends on a borrower’s credit score. While medical loans generally have lower interest rates than credit cards, those with less than perfect credit could see the opposite. Also, remember that secured loans may be used. In such a case, any collateral may be lost if the loan defaults, which is a consequence not often seen in medical credit cards.
Fees: Medical loans can come with a variety of fees not seen in other alternatives. One important fee is the origination fee. Some lenders charge a one-time origination fee that can range from 1% - 6%. This is to cover the cost of processing the loan. At times, the lender can subtract the fee from the total loan amount. This may leave you with less money that the total cost of the procedure!
What Are Some Factors I Should Consider?
Here are a few key factors to consider when shopping for medical loans:
Annual percentage rate: A loan’s APR may be the most important factor in comparing loans. APR represents the annual cost of borrowing, including interest and fees. APRs for medical loans can range widely, from 3% to 36%.
Fixed or variable rates: To avoid a surprise interest hike, it’s important to know whether the loan rate is fixed (interest and payments stay the same) or variable (interest and payments can rise or fall depending on the market). Variable rates are often lower, but fixed rates give a reassurance your monthly payments won’t change.
Origination fee: As discussed, find out if the lender charges an origination fee. If they do, it is also important to see if it is subtracted from your loan amount.
Loan term: This is your repayment period and greatly affects your monthly payments. Longer repayment terms results in lower monthly payments. However, this also means more total interest paid over the life of the loan. Again, use an online calculator to find what best suits your budget.
Funding Time: Some applications are lengthier than others. Additionally, some lenders take longer to release funding. Knowing this information beforehand can save you a lot of stress and frustration.
How Do I Get a Medical Loan?
If you decide that a medical loan is right for you, then here are some easy preparation steps before you apply.
First, decide how much you want to borrow. Look at your budget and crunch the numbers - find out the loan amount and loan terms that is the most manageable for you. There are a ton of online calculators that can help you visualize and play with the numbers.
Next, determine when you need the funds if possible. The time between applying and receiving your loans may take up to a week. As with many things, it can be beneficial to start early.
Now, let’s prepare some paperwork. Many lenders will let you prequalify, fast-tracking the application process and giving you a look at available rates and terms. However, this often requires things such as credit check/score, proof of employment or income. Getting these in order makes the process much smoother.
With your affairs in order, it’s research time. There are many lenders and loan options out there. Medical loans are available from online lenders, as well as brick-and-mortar banks and credit unions. The best way is to find the best interest rate and terms is to shop around. While the internet makes it easy to compare dozens of online lenders, don’t neglect your local credit union or bank. Once you get the best rate, you can use this as leverage by asking the next lender if they can match or beat it. Feel free to continue repeating this process until you get rock bottom rates!