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What is a Medical Expense Personal Loan?

3-Minute Read

Did you know in 1960, the average annual cost of health care per person in the United States was just $147? Account for inflation and compare this number to the average cost per person in 2017 – a staggering $10,739 – and you’ve got a 700% increase in health care costs over the last 60 years.

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.

What is a Medical Loan?

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.

How Do Medical Loans Work?

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.

But are Medical Loans a Good Idea?

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.

In addition to standard personal loans and in-house financing, a handful of lenders (such as CareCredit and AccessOne) offer medical credit cards, with interest rates as low as 0% to start. The big benefit to these is you can only use them for medical expenses; you can't swipe a medical credit card the next time you feel like shopping on Amazon.

How Can I Tell if a Medical Loan is Right for Me?

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.

Above all, 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.

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