Medical Debt Consolidation: Using a Loan to Pay Medical Bills
If you’re dealing with steep medical bills, you might be considering medical debt consolidation. Consolidating your debt can be beneficial in some circumstances, but it’s not the right move for everyone.
For instance, you might be better off negotiating your medical bills through the hospital’s billing department. Read more about your options below.
How to consolidate medical bills with a loan
If you’re struggling to pay medical debt, know that you’re not alone. According to a LendingTree study, 60% of Americans have been in debt due to medical expenses. Even after seeking assistance through your medical provider and insurer, you may still be stuck with expensive medical debt that’s difficult to keep track of — and even harder to repay.
One way to pay off your medical debt is to consolidate all of your unpaid medical bills into a single loan. You can do so using a personal loan, a balance transfer credit card, a home equity loan or a 401(k) loan.
Personal loans are lump-sum loans that can be used to pay for virtually anything, including medical bills — you can even repay medical debts across multiple providers. Personal loans are typically unsecured, which means they don’t require collateral, and they’re repaid in fixed payments over a set number of months or years.
When offering an unsecured personal loan, lenders rely heavily on your financial background to determine eligibility and interest rates. Borrowers with high credit scores and low debt-to-income ratios have their best chance of being approved for a personal loan with a competitive interest rate.
If you decide to take out a personal loan to repay medical debt, it’s important to shop around for the lowest possible APR* for your financial situation. Many lenders let you prequalify to check your potential interest rates with a soft credit pull, which won’t affect your credit. You can shop around through multiple lenders at once using LendingTree’s personal loan marketplace.
|Break your bill into smaller payments. This gives you more time to pay off your debt.||You’ll pay interest. Many medical providers offer interest-free payment plans.|
|APRs and payments are fixed. You’ll pay the same amount each month until the loan is repaid.||APRs can be high for some borrowers. The lowest APRs are reserved for consumers with excellent credit.|
|No collateral is required. Unsecured personal loans don’t require collateral, so you won’t risk losing property.||You may have to pay fees. You may have to pay a loan origination fee of 1% to 8% of the total cost of the loan, or a prepayment penalty for paying off the loan early.|
* APR, or annual percentage rate, is your cost of borrowing. It takes your interest rate and fees into account.
0% APR balance transfer credit card
If you paid your medical bills on a credit card, you might be able to consolidate them with a balance transfer credit card. Specifically, you could look for a balance transfer card with a 0% APR promotional offer.
This period won’t last forever, but you could take advantage of it and pay off your balance with no interest charges. Some credit card companies let you pay off your existing debt with a balance transfer check and then assume that amount on your new card.
There are some risks to this approach, however. First, you may have to pay a balance transfer fee, which typically adds up to 3% to 5% of the transferred amount.
What’s more, you’ll want to pay off the balance before the 0% APR period ends. Otherwise, you could get hit with high interest charges that make your debt even harder to pay off.
Home equity loan
Home equity loans allow you to borrow money from the equity you have in your home. They’re commonly used for home improvements, but you can use a home equity loan to consolidate debt, too. But you should use caution with this method: When you borrow from your home’s equity, you risk losing your home if you can’t repay the loan. You should only take out a home equity loan if you’re confident that you can repay it.
However, since home equity loans use your home as collateral, APRs are typically lower than that of unsecured personal loans. Some of the best home equity loan offers are still reserved for borrowers with a high credit score and low debt-to-income (DTI) ratio, so it’s best to do your research and shop around with multiple lenders.
It’s advised that you have at least 15% equity in your home to take out a home equity loan. To calculate your home’s equity, simply subtract the amount you owe on your mortgage from your home’s market value. So if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity, or around 33% equity.
|You’ll break your bill into smaller payments. This gives you more time to pay off your medical debts.||You’ll pay interest. Many medical providers offer interest-free payment plans.|
|APRs and payments are fixed. You’ll pay the same amount each month until the loan is repaid.||Your home is used as collateral. If you can’t repay the loan, you risk losing the roof over your head. Plus, you’ll typically need at least 15% equity in your home.|
|APRs are lower than personal loans. This makes home equity loans a cheaper option for repaying medical debt.||You may have to pay fees. You’ll likely have to pay closing costs, which can cost anywhere from 2% to 5% of the total loan amount.|
A 401(k) loan lets you borrow money from your own retirement account without a credit check. You can borrow up to $50,000 or half the vested amount, whichever is less, and you’ll have up to five years to repay the loan. Payments must be made at least quarterly.
While a 401(k) loan may seem like a good option, it’s important to consider the risks. If you can’t repay the loan, you’ll pay income taxes on the amount borrowed, plus a 10% early withdrawal penalty if you’re younger than 59½. And if your employment is terminated before you’ve repaid the loan, you may be required to repay the debt in full in as little as 90 days.
Lastly, tapping your 401(k) for funds will cost you in the long term through lost earnings. Due to how compound interest works, these losses can equate to quite a bit of cash over the years.
As an alternative, you could also consider a 401(k) hardship withdrawal if your provider allows it. You may be able to take a 401(k) withdrawal by demonstrating that you have an emergency financial need, including medical expenses. Here are a few things to consider:
- You can only borrow the amount needed to cover the medical expense.
- You’ll lose the money from your retirement account.
- You’ll have to pay taxes and may be subject to an additional 10% tax.
|You’ll have up to 5 years to repay the loan. This gives you more time to pay off your medical bill.||You’ll pay interest. Many medical providers offer interest-free payment plans.|
|Competitive APRs. The APR is typically the prime rate plus 1%.||There are tax implications. If you can’t repay the loan, you’ll have to pay income taxes on the amount borrowed, plus a 10% early withdrawal penalty if you’re under 59 ½.|
|No credit check required. This makes 401(k) loans alluring to borrowers with bad credit.||You may have to pay fees. 401(k) loan fees may include an origination fee, an application fee and annual maintenance fees.|
|Not all plans allow 401(k) loans. You’ll need to make sure they’re available by reviewing your plan documents.|
How medical debt consolidation affects your credit
You can boost your credit score by making on-time payments on your medical debt. Missing payments, on the other hand, will harm your credit score, whether your debt is consolidated or not.
Unlike some other types of debt, defaulted medical debt won’t be added to your credit report until it’s six months past due. This 180-day grace period is meant to provide time for you to resolve the issue, whether that means:
- Having your insurance company make a payment
- Correcting a billing error
- Negotiating a payment plan
- Resolving costs with the help of a medical advocate
- Pursuing financial assistance from a nonprofit organization
If you’re not able to resolve the issue during this time, the medical debt might be reported to the credit bureaus and turned over to a collections agency.
There are a few special circumstances when you could get the debt removed from your credit report. For instance, a credit bureau should remove the account if your insurance company is in the process of paying your bill.
If you’re a military veteran, you might also have a longer grace period of up to a year before your debt is reported. Plus, the delinquent debt must be taken off your credit report once it’s fully paid or settled.
Otherwise, your delinquent debt could remain on your credit report and drag down your score for up to seven years. Note that if you consolidate your medical debt with a personal loan or balance transfer credit card, you will likely lose the protections described above, as your loan will no longer be classified as medical debt.
5 other ways to find medical debt relief
Consolidating medical debt with a loan may not always be your best option, and you should do your research before you borrow money to repay medical bills. You may be eligible for a discount on your medical bills, and you may be able to enroll in an interest-free payment plan through the provider.
Consider these alternatives before taking out a loan to consolidate medical debt:
1. Negotiate with the hospital’s billing department
Before anything else, get in contact with your insurer and your provider to make sure the medical bill is accurate. Then, reach out to the hospital’s billing department to try to negotiate the medical bill. According to LendingTree data, 93% of people who tried to negotiate their medical bills succeeded in having their bill reduced or dropped altogether.
When negotiating your medical bill, keep these tips in mind:
- Check your bill for errors. Medical bills often have errors. You may have been billed in error if your service was coded incorrectly, your insurance denied a claim they should’ve paid out or even if your personal information was entered incorrectly.
- Offer to pay upfront for a discount. The hospital billing department may be more willing to cut a deal if you offer to pay immediately. Say something like, “I’m prepared to pay this bill today if we can reduce it to X amount.”
- Compare the cost of service. Do your research to see if you were overcharged for a particular procedure. Leverage information from a health care cost comparison website like Healthcare Bluebook to negotiate the cost of your own treatment.
2. Ask about payment plans and other hardship programs
Nonprofit hospitals are required by federal law to offer financial assistance programs, including reduced-cost care and payment plans, but the details of the program are up to the discretion of the hospital.
These programs are typically available to patients who are uninsured or whose income is at or below the federal poverty level (FPL).
Federal Poverty Level Guidelines
|People in household||Annual income|
*FPL for every U.S. state except for Alaska and Hawaii as of January 2021
The availability of hardship assistance programs also varies by state. For example, California law mandates that nonprofit hospitals offer free or discounted care for patients at or below 350% the FPL.
3. Enroll in a debt management plan through a credit counselor
Credit counseling organizations are typically nonprofit agencies that can advise and assist you on financial management matters. An accredited counselor may:
- Advise you on how to handle debts
- Help you create a budget
- Offer free educational materials and workshops
- Enroll you in a debt management plan
Debt management plans are programs designed to help you repay your creditors over a set period of time. These plans typically come with an enrollment fee and a monthly maintenance plan, although these fees may be waived if your household income is less than 150% of the FPL.
4. Pursue debt settlement
Debt settlement involves making a one-time, lump-sum payment to settle your medical debt. You might be able to pay only half of what you owe to get the bill taken care of. But before you choose this route, watch out for any hidden fees or taxes that might get charged on the forgiven amount.
5. Consider bankruptcy
While bankruptcy is a last resort, it might make sense for consumers who are completely overwhelmed by medical debt. The process can have a number of negative financial consequences, but it might be able to provide you with a fresh start. This guide on bankruptcy explains more.
What happens if you don’t repay your medical debt?
You may have heard that you can make minimum payments on medical debt or outright not pay it without consequence — but that’s simply not true. The consequences for not paying medical debt are similar to those of being delinquent on other types of unsecured consumer debt, such as credit card debt:
Your credit score will drop. Medical providers are not likely to report nonpayment to the credit bureaus. But once your medical bills are sent to a debt collector, they may then be reported, causing your credit score to drop.
Debt collectors can come after you. If you don’t pay your medical bills through the provider, they may send your debt to a collections agency. Debt collectors can then contact you to try to collect the debt.
You can be sued over the debt. While health care providers are less likely to sue than other creditors, such as credit card companies, it is still possible. If you’re successfully sued for debt, your wages may be garnished to repay it.
Is medical debt consolidation right for you?
Medical debt consolidation is helpful in some circumstances, but not in others. If your medical debt already has 0% interest, it might not make sense to consolidate it with a loan that charges interest. Even though you might be simplifying repayment by combining multiple bills into one, you could be making your debt more expensive overall.
What’s more, you need to make sure you can keep up with payments before consolidating your debt. Use a loan calculator to determine if you can afford the monthly bills on your new loan. If you can’t, consolidating won’t help your situation very much, or could even make it worse.
That said, if you already paid for your medical bills on a credit card, consolidating that debt might help you get a lower interest rate and better repayment terms. Overall, you need to compare the terms of your current medical debt with the terms of your consolidation offer to see which would be more beneficial to you.
Consolidating can help if it will make repayment more manageable, but it’s not guaranteed to be the best option in every situation.