Taking out a personal loan to cover ER visits, surgeries and hospital stays provides one alternative to running up balances on high-interest credit cards when you can’t pay medical bills. Other options, including a personal line of credit, a home equity loan or a 401(k) loan, also could help you better manage your expenses.
Aside from divorce and job loss, unexpected medical bills are one of the leading causes of debt in the U.S. Freddie Huynh, vice president of credit risk analytics at Freedom Financial Network, refers to these factors collectively as “the unholy trinity of financial hardship.” That medical care can leave someone in a financial jam may come as no surprise, considering the soaring cost, says Huynh.
Without insurance, the median cost of a hospital stay for a heart attack is about $53,000, according to research published in 2017 from the University of Texas Southwestern and other medical centers. That’s just a bit below the median U.S. household income of $61,372 in 2017.
And the picture isn’t much brighter for the insured. For example, cancer patients with little or no financial distress were spending about 10 percent of their household income on health care, researchers at the Duke Cancer Institute found in a 2017 study.
[Read: Best Debt Consolidation Loans.]
Insured or not, consumers could end up coughing up thousands of dollars in deductibles and copays, and unpaid bills — the symptoms of financial distress — may lead to a damaged credit score.
When a bill is unpaid, the medical provider can choose to write off the debt as a loss or sell it to a collection agency. You have a six-month grace period before the account appears on your credit report, but once it’s there, it can remain for seven years from the original delinquency date and may hurt your credit score. The good news is that certain credit-scoring models weigh medical collections less heavily than other types of collection accounts, and that six-month grace period can give you time to explore loan options if you can’t pay the bill right away.
Loans for Medical Debt
Before a medical bill negatively affects your credit, take steps to pay it down or off. Here are a few loan options for paying medical expenses.
Take out a personal loan. Consolidating your medical debt into a personal loan buys you time. Instead of a due date of “now,” you can take a few years to pay in monthly installments. The lender will give you a lump sum, and interest starts accruing immediately.
Personal loans, which may be ideal for people who know exactly how much they need to borrow, can range from $1,000 to $100,000, with interest rates that fall between about 6 to 36 percent. But even with interest, a personal loan may cost less than what a medical provider would charge, once you add late fees and other penalties.
If you can’t get approved for an unsecured personal loan, you may need to explore a secured personal loan, also known as a collateral loan. A collateral loan is backed by personal assets such as cars, homes or savings accounts, which the lender can possess and use to repay your loan if you default.
[Read: Best Personal Loans.]
Use a personal line of credit. Instead of getting a lump sum, you will be approved by a lender for a certain amount that you can draw from on demand. You’ll pay interest only when you make a withdrawal and only on the amount you borrow. This can be a good option if you have ongoing medical expenses.
Personal credit lines range from about $5,000 to $35,000, but some can go up to $500,000, and interest rates vary from about 10 to 22 percent. Many lenders won’t require collateral, although some may charge an annual fee or verify that you have cash in a bank account.
Tap a home equity loan or line of credit. If you have enough equity in your home — about 15 to 30 percent — you may qualify to take out a loan or line of credit using the property as collateral. The funds can pay for anything, including medical bills. Interest rates for home equity loans and home equity lines of credit vary. But here’s a big asterisk: If you can’t keep up with payments, you risk losing your home. This is why Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling and U.S. News contributor, says to “avoid these if at all possible.”
Take out a 401(k) loan. If you participate in your employer’s 401(k) program, you may be able to borrow against your account. The IRS sets limits on how much you can borrow from a 401(k): $10,000 or 50 percent of your vested account balance, whichever is greater, but not more than $50,000. For example, if you have $25,000 vested in your account, you could borrow half that amount, or $12,500. According to IRS rules, you have to pay back the loan within five years, making mostly equal payments at least quarterly.
Tapping into your 401(k) assets might seem like a good idea now, but you could regret it later. Before taking out this type of loan, keep in mind that although you may solve an immediate problem, you could face long-term consequences, such as a huge tax bill or an insufficient retirement fund.
What to Look for in a Low-Cost Loan
By choosing the right loan, you can save money while you pay off your medical debt. After all, “Nobody wants to pay more for their health care than they have to,” Coleman says.
As you look at loan options, consider these factors:
— The annual percentage rate, or APR, includes the interest rate, plus fees. You’ll need strong credit to qualify for the best rates.
— The loan term, or period of time to pay off the loan, will affect how much interest you pay. Generally, you’ll pay less interest overall with a shorter term, although the monthly payments will be higher.
— The APR may be fixed — meaning it won’t change over the life of the loan — or variable, meaning it could increase. You could end up paying more interest with a variable-rate loan compared with a fixed-rate loan.
— An origination fee is a one-time, upfront fee that some lenders charge. It may be 1 to 6 percent of the total loan amount and is sometimes subtracted from the amount you receive.
— The monthly payment is what you’ll pay each month, including fees and interest. Make sure this payment fits within your overall budget.
[Read: Best Home Equity Loans.]
More Ways to Cover Medical Costs
If loans aren’t an attractive option for covering your medical costs, consider these alternatives:
Get a credit card. A zero percent introductory APR credit card could be a way to pay for your medical treatment while skipping interest fees. “It’s all about discipline,” Coleman says. “Try to repay the credit card debt quickly so you won’t incur interest charges. But that’s the risk — the interest.”
Some introductory periods extend to as long as 18 months, but once that time frame is over, you will pay interest on any remaining balance. That interest could cost more than a finance charge from a medical provider.
Apply for a medical credit card. Your doctor’s office may offer a credit card designed to pay for medical expenses, but these cards usually come with more restrictions than regular credit cards. For example, the issuer may give you a list of services you can charge to the card, such as dental or cosmetic work, and you might have to charge a minimum amount to qualify for interest-free financing. And even if you get a great interest rate, it may apply only during an introductory period. If you don’t pay off your medical expenses during that time frame, you may owe retroactive interest on the whole card balance.
Ask about in-house financing. “Reach out to the provider and see if they’re willing to offer a payment arrangement spread over a series of months,” Coleman advises. “There is usually some wiggle room for negotiation.”
First, ask about any hardship discounts, and then propose an amount you can pay every month, along with an end date. Ask whether the provider will charge interest or fees, and get all details in writing before you agree to a deal.
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Correction 02/20/19: A previous version of this story misstated Freddie Huynh’s title and company.