The cost of healthcare, from family planning procedures to emergency room visits, can be substantial. Even with health insurance, annual out-of-pocket liabilities can be in the thousands. According to a 2019 Kaiser Family Foundation survey, the average amount for out-of-pocket medical expenses per family is $6,015 per year.
Add in uncovered costs and the bills can skyrocket. For example, laser vision correction surgery can be $3,000 per eye, braces can easily run $6,000, and two premium hearing aids can set you back $10,000 or more.
For this reason, medical loans exist. These specialized financing products allow consumers to pay for a wide array of medical expenses over time and can help ease the burden of both planned and unplanned medical expenses.
As with all financing products, however, medical loans come with important considerations. Depending on your health insurance plan, you may have a health savings account (HSA) or a flexible spending account (FSA), which are both tax-advantaged accounts that allow you to save specifically for medical costs. Before committing to a new financing product, it’s worthwhile to first review the details of any existing HSA or FSA.
For out-of-pocket medical expenses that may exceed what you have in savings, HSAs or FSAs, consider the following aspects of medical loans — as well as other options for financing — to determine which is right for you.
How medical loans work
Funds from a medical loan are intended for an individual’s or a family’s healthcare expenses. They're typically offered by online lenders, though some traditional banks and credit unions do as well. Terms and conditions vary by lender, and qualification typically depends on your income, expenses and creditworthiness.
Because medical loans are installment loans, you would receive a lump sum of money, then repay it over a set time period (the loan term) with fixed monthly payments. A portion of each payment goes toward the interest as well as the principal. The interest rate is typically fixed, meaning it will remain constant for the lifespan of the loan. Annual percentage rates (APRs) range dramatically, often from 3.49% to 35.99%.
Some medical loans are secured with collateral such as home equity or a car, but most are unsecured so collateral isn’t necessary.
As a borrower, you can use the loan for a variety of medical expenses and bills, including:
- Insurance deductibles and copayments
- Out-of-network healthcare providers
- Glasses, contacts and vision procedures
- Fertility treatments
- Cosmetic procedures
- Medical debt consolidation
Be aware, though, that medical loans are just one way to pay for these expenses. Among your alternatives may be a personal loan or a personal line of credit. A personal loan will enable you to cover past and current medical expenses. If you don’t need a large lump sum right away, a personal line of credit can help you handle planned and potential expenses as they arise.
Qualifying for financing for medical loans
To determine qualification and set terms, the lender will review your employment status, income and monthly expenses. It will run a credit check, and as long as your credit scores are in the good-to-excellent range, you should qualify for a loan with a preferable interest rate. The loan amount also depends on how much income you have remaining after household expenses and existing debt payments have been deducted.
Obtaining a medical loan with a low interest rate is important because it will save you money. Since the rate you get is largely dependent on your creditworthiness, review your credit reports from the three major credit reporting bureaus, Experian, TransUnion, and Experian. You’ll be in an attractive position if your reports show a long series of on-time payments with a variety of credit products, no derogatory information (late payments, collection accounts, and bankruptcies), and you owe very little in comparison to your credit lines.
Credit scores are derived from the data on your credit reports, so if everything on your credit reports is positive, your scores will be high. FICO Scores and VantageScores range from 300 to 850, and to qualify for a loan with the lowest APR, your scores should be 740 or above. If they’re not, there are steps you can take to boost your credit scores.
Finding the right medical loan
If a medical loan seems appealing, make sure you identify the best loan product and provider when applying. Look for the following:
- The lowest APR. Since the APR reflects the true cost of the medical loan, obtaining the lowest possible rate is important. An excellent APR will be in the single digits.
- A fixed rather than variable rate. Although most medical loans come with fixed APRs, some have variable rates. The advantage of a fixed APR is that you can predict exactly how much the loan will cost. A variable APR is tied to an index, such as the prime or the London Interbank Offered Rate (LIBOR). It may start out lower than the fixed-rate loan, but the rate can rise if the underlying index adjusts upward.
- Few, if any, additional fees. Many lenders charge an origination fee which covers the cost of processing the loan. These fees are usually a few percentage points of the loan amount. Not all do, though, so if you want to save money, look for one that doesn’t. Take a deep dive into the agreement, looking for any other fees that may be attached to the loan.
- Shortest affordable repayment term. Longer-term loans are more expensive, even if the APR is low. Consequently, you’ll want a loan with the shortest repayment term you can afford.
- Ease and duration of the application process. After completing and submitting the application, most online lenders will provide you with an answer almost immediately. If you qualify, the money will likely be available to you within 24 hours. If you go through a more traditional financial institution, the process can be a little longer. In either case, the application should be clearly and understandably written.
Additionally, the lender should also have a strong customer service center, with representatives available to assist you with any questions.
Alternatives to a medical loan
While medical loans can be beneficial, other financing options exist and are worth exploring. Your initial step is to make sure you’re getting the lowest price for the medical treatment or medical procedure. Communicate with the provider, and try to negotiate the best deal, and possibly an internal payment plan that doesn’t involve a loan or interest. If so, you may be able to handle the bill with the cash you have on hand.
If not, or you’d rather not use your personal funds, consider the following alternative options:
- Personal line of credit. A great alternative to a medical loan is a personal line of credit. Here’s how a personal line of credit works: It gives you a set amount of money from which you can borrow for a certain number of years, called the draw period. You won’t be charged any interest on the amount you don’t use, and you can borrow up to the loan limit at any point during your draw period. Once you do make a withdrawal, you’ll need to start making payments back on the account—these may be interest-only, or include principal and interest, depending on the lender, so it’s important to shop around to find the best personal line of credit for your needs. If your draw period comes to a close and you still have a balance on the account, you’ll enter what’s known as a repayment period. During this time you’ll be given a specific time frame to pay off what’s left. A personal line of credit offers a great deal of flexibility, so it's perfect for planned medical costs, such as elective or other surgeries that aren’t covered by insurance, as well as the unknown expenses that may come up in the future. Check out how much you can save with a personal line of credit.
- Personal loan. If you know you need a certain amount of money right away, you may consider taking out a personal loan in that increment. Personal loans can also be ideal for refinancing old medical debt at preferable rates. Personal loans don’t have to be used only for medical costs, and the interest rates may be lower than for those attached to medical loans.
- Existing credit card. A credit card that you currently have may be used for medical bills, but charge prudently. High medical expenses can eat up your credit line and hurt your credit scores. The average APR on current cards is 16.03%, so if you don’t pay the debt off quickly, the costs will escalate as interest compounds.
- Medical credit card. You may also qualify for a medical credit card that comes with 0% APR for six to 24 months. As long as you repay the debt within the introductory timeframe, the loan is free, but after that it will revert to a much higher APR. To qualify, you’ll need good-to-very-good credit history and score. Be sure to only use it for the intended purpose, though, since if you charge other types of expenses, it will be harder to maintain accurate records for tax purposes.
- Wait. If your medical expense is not urgent and your credit rating prevents you from getting a credit product with a low rate, take the time to increase your credit score. You can also begin to set cash aside in a health savings account and accumulate what you need so you don’t have to borrow any money at all.
Approach all of your financial decisions with care. Using a specialized loan for medical bills may be a fine choice, but it’s rarely the only one — and sometimes not the ideal solution, depending on circumstances. When you want access to a substantial amount of funds with the greatest level of flexibility, as well as the lowest costs, a personal line of credit can be the preferred way to pay for medical expenses. Some healthcare costs, such as those related to family planning, can’t be precisely timed or estimated, so having flexible access to funds when you need the money can give you valuable peace of mind.
See your rate on a personal line of credit with First Republic by visiting our Personal Line of Credit Calculator.