Last Updated: Sep 12, 2024
Medical loans help you pay for expensive healthcare procedures like fertility treatments, dental work or surgeries.
Like personal loans, medical loans are typically unsecured and can cover expenses ranging from $1,000 to $100,000. Medical loans are provided by hospitals, healthcare systems and even traditional lenders.
In a recent MarketWatch Guides survey, 9.1% of those who took out a loan did so to pay off medical debt. We’ll help you understand the nuances of medical loans, plus how to qualify and apply so you can address your healthcare needs while safeguarding your financial well-being.
What is a Medical Loan?
Specialized medical loans, also known as health care, surgery or copay loans, are provided by hospitals, health care systems, health care providers and even traditional lenders for health care expenses. These expenses can include fertility treatments, dental work, emergency services, surgeries and more. Medical loans are typically unsecured and may cover medical expenses from as little as $100 or less to as high as $40,000.
How To Qualify for a Medical Loan
Qualifying for a medical loan depends on the lending institution. If you apply through a traditional lender, they will consider your credit score and DTI ratio. This information tells lenders whether you are a low- or high-risk borrower. If you have an excellent credit score and a low DTI ratio, you may be offered a higher loan amount and a lower interest rate.
Creditworthiness is often not considered, or at least not the main deciding factor, for medical loans from a health care system or provider. These lenders may be more willing to work with individuals with little to no, or even bad, credit. However, income and employment status may still be considered to ensure your ability to repay the loan or other financing alternatives.
In the News: Medical Loans
Medical Debt Ban on Credit Reports
On June 11, the Consumer Financial Protection Bureau (CFPB), together with the Biden administration, proposed a rule that would eliminate medical debt from appearing on credit reports. The rule could go into effect as early as next year, helping the nearly 15 million Americans whose credit reports are negatively impacted because of a collective $49 billion in lingering medical debt.
CFPB Director Rohit Chopra said in a press release that “medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans.”
Research from the CFPB shows that the rule, if passed, would allow more than 22,000 additional households to be approved for mortgages each year.
Pros and Cons of Medical Loans
Medical loans have various advantages and disadvantages. They allow you to access both necessary and elective procedures. However, their use may come with hefty fees and can lead to financial hardship if not carefully managed.
Pros
Quick funding: You could potentially qualify for a medical loan in one or two business days.
Potential low-interest alternative to credit cards: Medical loans may provide a lower-interest option to traditional credit cards.
Avoid depleting savings: Using a medical loan can help you avoid drawing from your savings.
Extended repayment periods: Medical loans can make access to health care more affordable as you can pay for it over time rather than having to foot a hefty bill all at once.
Cons
Possible higher interest rate: If you have no or poor credit, you may not qualify for a low-interest option.
Credit impact: Taking out a loan will impact your credit, and defaulting on the loan will negatively impact your credit score.
Potential for high debt: Depending on the cost of your medical procedure, taking out a loan could result in a high debt-to-income (DTI) ratio. This measures your monthly earnings against all of your loan payments, including any existing student loans or car loans.
Limitations on use: Medical loans specifically from a health care system or provider can only be used to cover medical expenses outlined in the loan terms.
Medical Loans vs. Personal Loans
Personal loans from traditional lenders, such as banks, credit unions and online lenders can be used for a variety of purposes, including but not limited to medical expenses. These loans may be unsecured or secured, the latter requiring collateral that can be seized for repayment if you default on your loan.
Traditional loans typically have no restrictions on how the money may be used — common uses include debt consolidation, home improvements and medical expenses. Applying for these loans typically requires income verification and a hard credit check.
Medical loans are earmarked specifically for medical expenses and may be faster and easier to qualify for through a health care system, as the goal is to help you access health care services quickly.
For traditional personal loans, your loan amount is mainly tied to your creditworthiness. You may qualify for higher loan amounts if you have a high credit score and meet the lender’s eligibility criteria. Personal loans can also provide longer repayment terms, which means lower monthly payments.
For medical loans, the application criteria may not put a lot of emphasis on — or even require — a strong credit history. To qualify, lenders may look primarily at your income and upcoming medical expenses. However, loan repayment terms may also align with the treatment period, with the end date and complete repayment due by the last treatment.
For comparison, a 12-month treatment costing $5,000 may require the entire balance be paid by month 12 with a medical loan, averaging a little over $400 per month. Using a personal loan could extend this payment by a few years, but cut your monthly payments in half.
Your loan decision depends on your needs, banking options and credit history. A personal loan may be a better option if you want to use the money to cover medical costs related to the loan, but not directly related (such as associated travel and meal expenses).
A personal loan may also be a better choice if you’re part of an institution that provides low interest rates and longer repayment timelines. Since the personal loan amount also depends on your creditworthiness, you may qualify for loan amounts that are considerably higher than the estimated medical expenses, leaving you with more financial flexibility.
A medical loan may be the better option if you have no or limited credit history, which makes it harder to qualify for a personal loan. Working within the medical system could also provide a better customer service experience, a one-stop shop for navigating the billing processes and for the timely coordination of the treatment you need. Some providers may also provide zero or low-interest promotional periods that reduce the interest paid over the life of the loan.
How To Apply for a Medical Loan
- Prepare Information: When applying for a personal loan to cover medical expenses, be prepared to share general financial information. For medical loans through a health care system, you may only need to provide proof of identity and income verification information during the application process.
- Prequalification: To receive preliminary offers from multiple lenders, you can prequalify with your top choices. Prequalification involves a soft credit pull, which doesn’t impact your credit score.
- Fill out Loan Application: Once you choose a lender and officially apply for a loan, the lender will run a hard pull on your credit.
In general, for a smoother application process, be prepared to show the following:
- Medical expense information, documenting the details and expenses for the medical treatment to be covered by the loan.
- Proof of identity, such as a government-issued ID card and your Social Security number.
- Proof of address, such as a utility bill or lease agreement.
- Proof of income, such as recent pay stubs and employer information, W-2 forms or bank statements.
- Deposit information, such as the bank account and routing numbers where the funds should be deposited.
These documents will help you provide the information lenders typically require to quickly approve and administer your loan.
Medical Loan Alternatives
Other options for taking out a medical loan include using health savings accounts (HSAs), applying for payment plans or participating in crowdfunding.
Health Savings Account
An HSA is typically provided through an employer and allows you to contribute pretax income into an account for qualified medical expenses. This type of account has a triple advantage because the money goes into the account pretax, grows tax-free and can be withdrawn (for appropriate expenses) tax-free. You must be on a high-deductible health plan to qualify for an HSA. For 2023, you can contribute up to $3,850 per year on an individual plan and up to $7,750 per year on a family plan.
Payment Plan
For this option, you can contact the medical facility’s billing department for assistance in repaying your loan. Payment plans are arranged according to the amount of the bill and your ability to pay it back. These plans may have shorter terms, leading to higher monthly payments. That said, if you default on the plan, it may immediately be sent to collections.
The Bottom Line: Medical Loans
Millions of Americans with and without health insurance continue to be affected by medical debt. Medical debt, or the inability to access financial assistance for medical care, makes many people delay necessary treatments (such as a root canal) and surgeries or elective treatments. Medical loans provide an option for these individuals to get access to health care and consolidate their debt.
Personal loans, offered through traditional lenders, may provide more flexibility in the use of funds and repayment timelines but are tied to having good credit. On the other hand, medical loans help make health care more accessible regardless of credit history, but may have less flexibility in fund use or timelines for repayment. As alternatives, you may consider using an HSA or a payment plan through the health care system.
When deciding on your health care financing option, it’s important to make an informed choice and explore options that suit your individual circ*mstances.
Medical Loans: FAQs
Medical loans provided by a hospital or health care provider are typically designed to make health care more accessible. These loans may have more lenient credit requirements and lenders may not even consider your credit history for approval. Lenders often consider whether the loan can be repaid and link the repayment period to the treatment time frame.
However, always do your due diligence to evaluate loan terms and eligibility criteria, as they vary from one institution to the next.
Similar to other types of loans, medical loans do not inherently hurt your credit unless you default on payments or take on too much debt relevant to your income. If your lender runs a hard credit check during the application process, this could result in a temporary dip in your credit score.
Medical debt is one of the most significant debt types in the U.S.ates, affecting one in five households, per the Consumer Financial Protection Bureau. The U.S. government passed the No Surprises Act in 2022 to combat this medical debt crisis, protecting Americans from unexpected bills and having invalid medical debt appear on credit reports. It also requires the removal of all paid medical debts, obligations under a year old and medical collections under $500 from credit reports. This last step went into effect this year on April 11.
In other words, millions of Americans will have some paid, invalid, new or low-dollar-amount medical debt removed from their credit history.
The best medical financing option depends on your existing resources, medical needs and credit history. With a strong credit history, you may qualify for a personal loan with a high loan amount, longer repayment timeline and low interest rate. These loans provide flexibility, allowing you to pay for numerous expenses beyond just medical expenses.
Medical loans are designed to improve accessibility to health care, making the loan application and qualification criteria less stringent. While medical loan repayment timelines are often shorter, they may also have an interest-free, deferred-interest or zero-down promotional period to offset the interest payments and make repayment more feasible.
Regardless of the loan type that you choose, be sure you understand the loan terms and agreements, especially the use of funds, interest rates and repayment timelines, to make an informed decision to protect both your future finances and your health.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].
