Using a Personal Loan for Medical Expenses: What to Consider

Why Medical Costs Might Lead to Borrowing

Medical care is expensive and often unexpected. Even with insurance, deductibles, copays, and out-of-network charges can leave you with a large bill. When savings are not enough, you might consider borrowing to pay for necessary treatment, dental work, or veterinary care.

Borrowing for medical expenses is a significant decision. Medical bills are the most common collections item on consumer credit reports, appearing on 43 million credit reports, and about one in five households reports unpaid medical bills. Understanding your options before you borrow can help you avoid costly debt and protect your credit.

This guide explains what to know about using a personal loan for medical bills, as well as alternatives like payment plans, medical credit cards, and conventional credit cards.

Sources: Consumer Financial Protection Bureau

Personal loans for medical bills: pros

A personal loan is a type of installment loan you can often use for any purpose, including medical expenses. Unlike medical credit cards or payment plans, which are often arranged through your provider, a personal loan is a separate financial product you obtain from a bank, credit union, or online lender. The CFPB notes that consumers with time before a medical procedure can consider alternative financing options, including checking with their bank or credit union about personal loan options.

The main advantage of a personal loan is that it provides a lump sum of money that you repay in fixed monthly payments over a set term. This can be simpler than juggling multiple medical bills, and you may find a lower interest rate than what medical credit cards offer—especially if you have good credit. However, personal loans are not without drawbacks. You'll owe interest on the full amount, and you'll need to make payments on time, even if your medical situation changes. Also, unlike some medical billing protections, a personal loan is reported to credit bureaus like any other loan, and failure to repay can damage your credit.

Before applying, compare personal loan offers from multiple lenders. Look at the annual percentage rate (APR), which includes interest and fees, and the monthly payment. Also consider the repayment term: a longer term means lower monthly payments but more interest paid over time.

One thing to note: the terms and conditions of personal loans vary by lender. Be sure to read the fine print and ask about any origination fees, prepayment penalties, or other charges.

• Provides a lump sum to cover medical costs, which you repay in fixed installments.
• Fixed interest rate and predictable monthly payments.
• Interest rates on personal loans vary widely by lender and creditworthiness; compare APRs to see if a personal loan is cheaper than medical financing.
• Requires that you repay the loan regardless of your medical outcome.

Sources: Consumer Financial Protection Bureau

Alternatives: Payment Plans, Medical Credit Cards, Hardship Programs

Personal loans are just one way to pay for medical care. Providers may offer payment plans or medical credit cards at the point of care, and there are also charitable and government assistance programs. It's important to understand the trade-offs of each.

Medical payment plans and medical credit cards are often more expensive than other forms of payment, including conventional credit cards. Interest rates on these medical financing products can reach above 25 percent. They may come with promotional offers, like deferred interest, which can be risky. Deferred interest means that no interest is charged during the promotional period, but if you don't pay the balance in full by the end of the promotion—or if you make a late payment—interest can be charged on the full original amount at a rate that can exceed 25 percent. This can quickly turn a manageable bill into a large debt.

In contrast, a conventional credit card may be a better option than a medical credit card or payment plan, depending on your situation, because it might have a lower interest rate. However, keeping a large balance on any credit card can still be costly.

Before you agree to any medical financing, remember that nonprofit hospitals are required by law to provide free or reduced-fee care through financial assistance programs. Some private hospitals also have financial assistance policies. You can apply for these programs before borrowing. Once you put a hospital bill on a medical credit card or payment plan, it may be more difficult to receive financial assistance from the provider.

Health care providers may have financial incentives to offer medical credit cards and payment plans, and those incentives may not align with your best interest. That means you should carefully evaluate any offer you receive at the doctor's office or hospital, and consider whether a personal loan or conventional credit card might be a better fit.

• Check with the hospital or provider about financial assistance policies before you sign up for any financing.
• Compare the APR and terms of a personal loan or conventional credit card with any medical credit card or payment plan.
• Be wary of deferred-interest promotions: if you don't pay the balance in full by the end of the promo period, you may owe interest on the full amount charged.
• Ask your provider to verify the bill and correct errors before you pay.

Sources: Consumer Financial Protection Bureau

How to Compare Financing Options

Choosing how to pay for medical care starts with understanding the true cost of each option. Here are some factors to compare:

Deferred interest: Some medical financing offers a 'no interest if paid in full' period. If you don't pay the entire balance on time, you can be charged interest from the beginning, often at a rate exceeding 25 percent. Be especially careful with these promotions.

Fees: Some loans and credit cards charge origination fees, annual fees, or late-payment fees. Factor these into your comparison.

Repayment flexibility: Can you pay off the balance early without a penalty? What happens if you miss a payment?

Impact on credit: Most financing options will appear on your credit report. Late payments and high balances can hurt your credit score.

You can also ask the provider for a 'good faith estimate' of costs before care (if you are uninsured or not using insurance). Under the No Surprises Act, providers must give you this estimate, and you may be able to dispute charges if they exceed the estimate by $400 or more.

If you are considering a personal loan, shop around with your bank or credit union and compare offers. Look at the total cost of the loan, not just the monthly payment.

• Compare APRs: higher rates cost more in the long run.
• Read the terms for deferred interest and potential retroactive charges.
• Consider the total amount you'll pay over the life of the loan or card balance.
• Check that you can afford the monthly payments, even if your income changes.

Sources: Consumer Financial Protection Bureau

Avoiding Medical Debt Traps and Scams

Medical debt can follow you for years. Before you borrow, understand your rights and take steps to avoid common pitfalls.

First, you have the right to dispute medical bill errors on your credit report and to ask a debt collector to verify that a debt is valid. Debt collectors are not permitted to report a medical bill to credit reporting companies without first attempting to collect the debt from you. If a collector contacts you, respond in writing to dispute the debt if you believe it is not yours.

Second, be aware that paying for medical care with a medical credit card or payment plan can change your rights. Unpaid medical bills through these products are not subject to the same credit reporting protections that apply to other medical bills. That means they can be reported to credit bureaus and may affect your credit score more severely.

Third, consider whether you might qualify for financial assistance before you borrow. Nonprofit hospitals are required to help patients who cannot afford their bills. Even for-profit providers may have charity care policies. Ask for an application and fill it out.

Finally, be wary of scams that promise to eliminate your medical debt for a fee. No legitimate program can guarantee to remove accurate medical debts from your credit report. If you are struggling to pay, talk directly with your provider's billing office about options such as payment plans, reduced charges, or financial assistance.

If you need help with medical bills, you can also contact a counselor approved by the U.S. Department of Justice for credit counseling, but be sure to verify their credentials.

• Dispute billing errors and ask for verification of debts.
• Understand that medical financing products may not have the same protections as direct medical bills.
• Apply for financial assistance before you commit to borrowing.
• Never pay a company that claims it can remove accurate medical debt from your credit report.

Sources: Consumer Financial Protection Bureau