Does it make financial sense to get a personal loan for medical bills?

Peter Miller
Peter Miller
The Mortgage Reports Contributor
October 3, 2019 - 3 min read

Should you get a personal loan for medical bills? Medical bills are a kind of piling on. After you’ve been sick or injured you then have to deal with bills. They can be full of codes and difficult to understand. They may appear larger than the national debt. You may face demands for money you don’t owe. To make matters worse, medical bills are notoriously inaccurate. They can ruin your credit.

The problem stems from a national health system which is both the envy of the world and largely inaccessible to those with limited funds. There are great doctors, clinics and hospitals. We can treat many diseases and conditions.

We also have a system where in too many cases medical breakthroughs are seen as income streams, patients are regarded as profit centers, and maximizing shareholder value is the only metric that counts. The result: Staggering prices and staggering price increases, in one case nearly 8,300% in less than a year.

Medical billing

Problems with medical billing are widespread.

According to Health Affairs, “bank transaction data reveal that in any given year, one in six families makes an extraordinary health care payment of roughly $2,000 in a single month. They time such payments to coincide with positive cash flow events, yet they have not recovered financially even a year later, as evidenced by a lower level of liquid assets and higher credit card debt.”

It adds that “health care spending is sensitive to a wide range of cash flow events, including job loss and the end of unemployment insurance, natural disasters, and mortgage interest rate changes.”

Affordability, however, is just one issue. A second issue is the matter of billing.

Medical billing & credit reports

“Approximately 20% of credit reports have at least one medical collection debt,” according to a 2015 agreemeent between the state of New York and the three major credit reporting agencies (CRAs), Equifax, Experian, and TransUnion. “Medical debt differs from other types of consumer debt, such as credit cards or auto loans, in several ways. First, medical debt may result from services that are involuntary, unplanned and unpredictable, and for which prices are rarely provided in advance. In addition, some medical debt results from disputes or delays in insurance coverage of particular bills. As a result, medical debt collection items on credit reports may not be accurate reflections of consumers’ creditworthiness.”

This agreement is crucially important today. It’s a national standard to prevent unfair and incorrect medical debt reports. The CRAs agreed not to list or display medical debts for at least 180 days – six months. This is thought to be enough time to settle insurance claims and payment issues in most cases.

Also, Fair Isaac, a pioneer in the credit score field, has evolved a helpful approach to medical debts for its FICO-brand credit reports. For several years it has distinguished between medical and non-medical collection agency accounts. It bypasses medical accounts once they are paid off, a strategy which it says can raise credit scores by 25 points for many credit users.

Personal loan for medical bills

While there has been progress on the credit report and credit score fronts there remains the problem of payment. Not everyone has insurance or adequate insurance. Even with insurance medical bills can be significant. In many cases individuals will put medical bills on credit cards, an expensive option as best.

What can you do if you have medical bills? There are several options.

First, speak with the doctor or facility and see if the debt can be negotiated down. A big payment up front can often help. To get a sense of medical prices in your area try the free Healthcare Bluebook.

Second, if available consider using a home equity line of credit (HELOC). This will quickly pay the bill and allow repayment of the debt over time. However, be sure you understand HELOC repayment requirements before running up a big balance.

Third, look into a personal loan for medical bills.

Personal loan for medical bills

With a personal loan you borrow from a bank, credit union or informal lender such as family and friends. The unsecured debt is paid back over several years with a fixed interest rate and a set monthly payment. Commercial interest rates can range from 6% to 36%, depending on your credit. Always look at the annual percentage rate – the APR – when comparing offers from commercial lenders. With commercial lenders be wary of origination fees, late charges, and prepayment penalties.

If you need $5,000 the numbers might look like this. A $5,000 loan over three years at 10% interest will require monthly payments of $161.34. At the end of 36 payments no debt will remain.

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