A helping hand for your health: medical loans for major medical expenses

Cost shouldn't stand in the way of getting the medical care you need. Whether you’ve been ill or you’re exploring your options for an elective procedure, medical bills are no joke. 

A medical loan might make it easier to pay for major healthcare expenses. Let’s explore what medical loans are and when they could benefit you.

What are medical loans?

A medical loan is a loan you take out to pay for healthcare expenses. How you use a medical loan is entirely up to you. 

Here are a few scenarios where a medical loan might come in handy. 

• Your spouse needs emergency surgery, and your health insurance won't pay all the costs. 

• You have a serious illness that requires months of treatment. 

• Your child needs braces, and you don’t have dental insurance. 

• You want LASIK surgery, and your insurance won't pay for it. 

• You're ready to start a family, and your doctor recommends in vitro fertilization (IVF), which comes with a high price tag. 

Because medical loans are flexible, you could use one to cover emergencies, ongoing treatments, elective procedures or something else. In other words, whatever you need to take care of your family's health.

Anyone can apply for a medical loan, whether you have insurance or you don't. 

Approval for medical loans could hinge on the type of financing. But generally, your ability to get a medical loan will depend on your credit score and income. 

How do medical loans work?

Medical loans work a lot like any other kind of loan. You borrow money to pay for healthcare expenses, then pay it back to the lender. 

The lender can set the repayment schedule. And they can also decide what to charge in interest and fees. 

Unsecured medical loans

Most medical loans are unsecured personal loans that don’t require collateral. That means you don't need to pledge something valuable that you own as a guarantee that you’ll repay the loan. Approval is based on your creditworthiness. 

Unsecured medical loans can come in a few different forms: 

• Personal loans. An unsecured personal loan allows you to borrow money for just about any expense. Medical and dental care are two of the top reasons people get personal loans.

• In-house financing. Your healthcare provider or healthcare facility might offer financing directly.

• Personal line of credit. A personal line of credit works a bit like a credit card, in that you could borrow against it as needed. You'd then pay back what you borrowed, plus interest. 

Secured medical loans

It’s possible to get a secured medical loan or a loan, where you borrow against a valuable asset. The best example of a secured medical loan is a home equity loan or home equity line of credit (HELOC). Both let you borrow against your equity, which is the difference between what you owe on your home and what it's worth. You pledge your home as a guarantee that you’ll repay the loan. Because pledging your home lowers the risk for the lender, this type of loan could cost less than unsecured loans. 

With a home equity loan, you get a lump sum that you could use to pay for medical expenses or anything else. You'll pay back the home equity loan just like you would repay any other loan.

HELOCs are a little different from a home equity loan, and work like a line of credit or a credit card. You’ll get a few years during which you can borrow, repay, and borrow more as often as you like, up to your limit. You’ll only pay interest on the amount you borrow.  

Medical loan pros: When it might make sense to borrow for healthcare expenses

Getting a medical loan could help you cover your full cost of care. It helps to ask a few questions to decide if a medical loan is the right financing option. For example:

• Do you have any savings you could draw on to pay for healthcare? 

• What kind of interest rates or loan terms could you qualify for?

• Does your doctor offer interest-free financing or payment plans?

• Could you get any of your medical debt forgiven?

• Could your budget handle monthly payments for a medical loan?

If you’re in a situation where you’re facing large, unexpected medical bills, a medical loan could help you spread the payments out over time.

Should you get a 401(k) loan to cover medical expenses?

If you have retirement savings, you might be tempted to dip into it to pay for medical care. But that could short-circuit your financial goals for the long term. 

Hold on, if I get a 401(k) loan, I'm just paying it back to myself. So what's wrong with that? 

Well, for one thing, you could end up with a big tax bill if you leave your job before the loan is repaid. If you don’t pay off your loan within five years or you change jobs before you repay the loan, you’ll probably be hit with a bill for income taxes and an early withdrawal penalty. 

More importantly, any money you take out of your 401(k) or IRA to pay for healthcare stops growing. That could mean less money to retire on later. Taking out a medical loan leaves your retirement savings intact.

There is another option—a hardship withdrawal—and it also has its pros and cons.

According to the IRS, many 401(k) plans allow you to take out money before retirement to cover financial hardship, including medical expenses. A hardship withdrawal isn’t like a 401(k) loan, and you don't have to repay the money. However, you’ll owe income taxes on the amount withdrawn. Also, you can’t reimburse your 401(k) after taking a hardship withdrawal, even if you want to. Regular annual contribution limits still apply. 

The qualifications for a hardship withdrawal vary by plan. If you’re considering this option, you’ll need to talk to your plan administrator. If you don’t know who to contact, ask your HR department. 

Besides finding out whether it’s possible, you’ll also need to decide whether it’s a good idea. Consider these consequences of taking a hardship distribution:

• Any money you borrow now leaves you with less in retirement.

• You'll lose any potential investment growth on the money you take out.

• If your 401(k) contributions are pre-tax (meaning you don't pay taxes on the funds until you withdraw them), you’ll pay income tax on your withdrawal.

• You might not be allowed to contribute to your 401(k) for six months after receiving the hardship distribution. 

These results could hurt you financially now and in the future. You might have better options that would allow you to let your retirement account continue to grow undisturbed. 

Medical loan cons: drawbacks to consider

Even a medical loan may not always be the best solution when you need money for healthcare. Here's why:

• Debt could be problematic if your budget simply can't handle another payment. 

• If you don't have excellent credit, you could get stuck with a higher interest rate. The higher your rate, the more you'll pay to borrow.

• Borrowing against anything of value puts that thing at risk. So it’s a good idea to think carefully before borrowing against your home.  

Tips for choosing the best medical loan

If you've weighed the pros and cons and think a medical loan is a good fit, it's time to find the right one and do some detective work. Start a spreadsheet. It can be as simple as a piece of notebook paper with seven separate columns drawn. Here's what you want to write at the top of each column and the information you need to make the best possible decision: 

• Lender's name

• Annual percentage rate (APR). Unlike the advertised interest rate, the APR tells you exactly how much you'll pay for the loan after fees are added in. 

• Minimum and maximum loan amounts

• Loan repayment terms. How long you have to repay the loan.

• Loan fees. Loan fees could be next to nothing or steep, depending on the lender and your credit rating.

• Minimum credit score and income requirements

• Special features. May include discounts for autopay or the ability to pause payments if you lose your job

Pay close attention to the details.. Sometimes, a good offer has strings attached. 

For example, in-house financing (such as from your health care provider) could come with deferred interest. This means you get a low promotional rate‌, but if you don’t pay off the loan before the end of the promotional period, you’ll owe interest on the entire loan from day one, including the part you’ve already paid off. That’s a common pitfall and could make in-house financing much more expensive than a personal loan. 

If you're considering a home equity loan or HELOC, you'll also need to consider your equity and ability to borrow. 

Researching loan options might be time-consuming but can be well worth your time. The best medical loan for you is one that allows you to borrow the amount you need at terms that work for your budget. 

How to get a medical loan

Perhaps the most important step is shopping for the right lender. No two lenders are alike, and everything—from APR to fees—may vary substantially. 

Check to find out whether you prequalify before you apply. Prequalifying means filling out an application that requires basic information, like your name, Social Security number, address, where you work, and how much you earn. The lender determines whether you're likely to qualify based on the information. If you prequalify, the lender tells you how much you're eligible to borrow, the interest rate, and the loan terms. 

Getting prequalified doesn’t mean you’re approved for the loan. It gives you an idea of where you stand. Once you’re satisfied with the details of the loan the lender thinks you could qualify for, you’ll still need to submit a formal loan application.

When you let your lender know that you’d like to move forward, you'll be asked to complete and submit a full loan application. Here's the information you'll typically be asked to provide: 

• Name

• Social Security or Individual Tax Identification Number (ITIN)

• Picture ID

• Proof of address

• Proof of income

• Bank statements

• Possibly, tax returns

Depending on your situation, your lender may request additional items. The faster you get the documentation to the lender, the sooner the lender can process your application. 

Can you get a medical loan with poor credit?

Yes, some lenders offer medical loans to borrowers with poor credit. However, you could expect to pay more in interest and fees. You may want to explore other options if your credit score isn’t where you want it. For example, if someone you know has an excellent credit score and is willing to co-sign your loan, their credit score could help determine the interest rate and fees. The catch is that if you miss payments, your co-signer is on the hook to pay them. It’s crucial to be sure you can keep up with payments before you ask someone to sign on to your loan.

Another option is to take out a secured loan by offering something of value as collateral, like a classic car, valuable jewelry, or coins. Collateral might allow the lender to be more flexible on its credit score requirements, because collateral lowers the risk to the lender. The benefit to you is that loans secured by collateral typically cost less than similar loans that are unsecured. Secured personal loans are a little harder to find but not impossible.

Using a medical loan for out-of-pocket expenses

Even if you have health insurance, it may not cover all your costs. You may have deductibles, copayments, or prescription costs you're responsible for. If that's the case, a personal loan could help you cover those charges as well. 

For some medical conditions, out-of-pocket expenses can be a heavy burden. For example, some estimates say that a mastectomy could cost $15,000 to $55,000 out-of-pocket.

Alternatives to medical loans

If now isn't a good time for a medical loan, don't worry. Medical facilities speak with patients every day who can't afford to pay their full medical bill, and many are happy to help in whatever way they can. Call the billing department at your doctor's office, hospital, or other medical provider's office. Tell them you have a bill you're concerned about, and ask for help sorting it out. One of these strategies may work for you: 

• Decide how much you can pay toward the bill, and ask the medical provider to forgive the rest. 

• Ask the provider to accept an interest-free repayment plan. Better yet, ask if they'll reduce the bill and allow you to pay the balance in equal monthly payments. 

• Ask the billing department to recommend outside groups that help people pay their medical expenses. You may just find that billing department employees are your best resource for the inside scoop. 

If the first call to your medical provider's office isn't as productive as you hoped, there are other options, including:

• Find out if your hospital is a nonprofit organization: The Affordable Care Act (ACA, or "ObamaCare") requires hospitals with nonprofit status to provide free or discounted care to people who need help paying their medical bills. If your hospital is a nonprofit, make it a point to ask about their in-house assistance program. 

• Ask whether the VA can help: If you're a veteran, you may qualify for financial hardship assistance, including repayment plans, copayment exemptions, and debt relief. Check the VA's website on financial hardship to learn what's available in your situation. 

Feeling overwhelmed is natural. Now may be the best time to consider a free and confidential discussion with a loan consultant regarding which strategies best fit your situation.