A large expense and an emergency expense can each be stressful enough on their own. It’s even worse when a situation combines the two. If you need funds to finance the bill, you’re probably looking at personal loans.
But what if your emergency bill is medical? Should you use a personal loan to pay medical expenses—or is there a better way?
The short answer is that you typically shouldn’t take out a personal loan to pay the health care provider. Let’s look at why it’s oftentimes a bad idea and consider the rare occasions that it could make sense.
What is a medical loan?
You’ve probably heard the term “medical loan” slung around when referring to paying hospital bills. But what exactly is a medical loan?
Put simply, a medical loan is a personal loan. The term “medical loan” is just a marketing tactic aimed at those looking to pay off medical bills. It’s got no distinctive medical-related upside when used to pay for hospital bills, medication, etc.
Personal loans can be used for nearly anything, from home renovations to debt consolidation to medical expenses. But just because you can pay the health care provider with a personal loan doesn’t mean you should.
Should you use a personal loan to pay medical bills?
Generally speaking, it’s not a good idea to take out a personal loan for this reason. After all, hospitals already provide payment plans (effectively a loan) in many cases—often with interest rates far below what you could get with a personal loan. And if you’ve undergone a particularly expensive procedure, a personal loan may not cover your full bill. Personal loan amounts are typically capped at $100,000.
There are additional advantages to not converting your medical debt into personal debt by taking out a loan. Medical debt is more forgiving than personal debt in a few ways:
- Once your medical debt becomes delinquent, credit bureaus extend a 365-day grace period for you to pay off your debt before it adversely affects your credit score.
- Even if you’ve got delinquent medical debt, all will be removed from your credit report once paid (as opposed to staying on your account for seven years like a delinquent personal loan).
- Some states don’t even allow medical debt on your credit report. If you live in one of these states, lenders can’t use medical debt information in their decision-making.
That said, there may be scenarios where it can be a fair strategy if approached with realistic and careful planning. Let’s take a look.
You want to consolidate multiple medical debts
Again, using a personal loan will almost certainly result in higher interest payments than had you used the payment plan offered by the hospital. But what if your multiple minimum payments add up to monthly costs you can’t afford? Opening a personal loan to consolidate multiple minimum payments might potentially result in lower monthly costs.
For example, let’s consider a hypothetical where you’re on the hook for $15,000 worth of hospital bills and a repayment term of 24 months with 0% APR. We estimate that would amount to around $416 in monthly payments. But if you opened a $15,000 personal loan with a 60-month repayment term at 10% APR, your estimated monthly payment would drop to around $318.
It would take considerably longer to pay off the loan in the above scenario—and you’d pay thousands in interest—but it would be a more manageable monthly bill.
Consolidating multiple debts may also appeal to those having a hard time juggling minimum payments and due dates from multiple medical entities (pharmacies, specialists, etc.). Staying on top of all those bills can take a lot of mental horsepower.
You need money for medical-adjacent expenses
Not all the costs incurred while obtaining treatment will qualify for a payment plan through a hospital or doctor’s office. You may also have related expenses that aren’t billed by the health care provider for which a personal loan can make sense, such as travel and lodging to get special treatment, childcare, support groups, etc.
Pros and cons of using a personal loan to pay medical bills
Pros
- Consolidate multiple medical bills
- Can cover more health expenses than just medical procedures
- Get money you need quickly
Cons
- APR may be higher than what’s charged by the health care provider
- Personal loans may not cover exceptionally high balances
- Delinquency will stay on your credit report longer
Alternatives to personal loans for medical debt
Aside from strategies like bill negotiation, hiring a medical billing advocate, requesting assistance from local and state programs, etc., you’ve got a handful of alternatives to opening a personal loan to pay medical debt.
Payment plan
To reiterate, a payment plan directly with the hospital is likely your cheapest and most convenient option for repaying medical debt. This also enables you to use, say, your Health Savings Account (HSA) to repay the debt. If you use a personal loan to settle your medical debt, you can’t then use your HSA to pay your personal loan, as it’s no longer a qualified medical expense. And distributions from an HSA that don’t go toward qualified expenses incur a 20% tax penalty from the IRS.
Low-APR credit card
Strategically using the right credit card might potentially be a cheaper way to finance your medical debt than a personal loan.
Plenty of credit cards offer a 0% intro APR period on purchases and for a year or even nearly two. Assuming you’ve got the good to excellent credit typically needed to qualify for such cards, and the expense is small enough to fit within the credit limit you’re granted upon approval, such a card can allow you to avoid interest charges entirely. Once the introductory period ends, any debt remaining on the card begins accruing interest at the account’s regular APR.
Note that for this to work well, you’ll need to be disciplined about repayment— understand that in all likelihood, the minimum monthly payment will not be enough to pay in full while you’re in the 0% period. You should do the math to determine how much you need to pay to zero out the debt within the introductory period, and stick rigorously to at least that payment amount.
There also exist medical credit cards, advertising low intro APRs for those who need treatment now but can’t afford it. But there’s an enormous (and insidious) difference: Medical credit cards generally charge “deferred interest.” This means that you’ll pay no interest if you fully repay your balance before the interest-free window ends. But if even a red cent left of your debt remains, you’ll be retroactively charged interest for the entire interest-free period.
For this reason, we recommend staying away from medical credit cards if you can help it.
Home equity loan
If you’ve built substantial equity in your home, you may consider taking out a home equity loan to pay your medical bills instead of a personal loan. Your borrowing amount may be higher, and you’ll typically have more flexible repayment terms (home equity loan terms can last up to 30 years).
There are downsides, as well. You may pay additional fees that don’t apply to a personal loan (think costs like appraisal fees, title search fees, etc.), and getting your funds could take a bit longer. You’re also using your home as collateral, which could result in losing your property if you default on your loan.
The takeaway
Health care providers generally offer to set you up on a payment plan if you can’t afford to pay in full. You’ll often be charged little-to-no interest, generally making it a better option than a personal loan.
That said, if the monthly medical payments are too high, you may possibly be able to lower your minimum payment by opening a personal loan with a lengthy repayment term. Just remember, you’ll pay for it with interest.
Frequently asked questions
What is a medical loan and how does it work?
A medical loan is a standard personal loan, except it’s marketed toward those who need to pay off medical debt. There is no real differentiating factor between a medical loan and, say, a debt consolidation loan, aside from how you use the funds.
What types of medical expenses can a medical loan cover?
A medical loan can cover just about any medical expense. Again, it’s a simple personal loan which you can use however you wish (as long as the purchase is legal).
Is a personal loan better than a credit card for medical bills?
A personal loan can be better than credit cards for medical bills in that personal loans often have considerably lower interest rates than credit cards. Also, installment loans don’t count toward your credit utilization, so your credit score is less likely to be affected. However, a 0% intro APR credit card may save you more money if you’re able to pay off the balance before the interest-free window ends.
Can you negotiate medical bills before taking out a loan?
You can try to negotiate medical bills before taking out a loan. Some providers may even offer a steep discount if you pay your bill in full immediately. This could potentially lower your bill by hundreds or thousands of dollars.
Will taking out a medical loan hurt your credit score?
Taking out a medical loan will ding your credit score slightly, as your credit will sustain a hard credit inquiry. With responsible credit usage, your credit score should rebound shortly.