Debt Consolidation
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Medical Debt Consolidation: Using a Loan to Pay Medical Bills

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You can’t always plan ahead for medical treatment, and often you don’t have a choice before seeking medical help. Medical treatment can come at a steep cost, resulting in burdensome medical debt.

Fortunately, there are a few ways to pay off medical debt, such as by borrowing a medical debt consolidation loan and negotiating your medical bill 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. More than 1 in 4 (26%) Americans reported difficulty paying medical bills, a 2016 Kaiser Family FoundationKaiser Family Foundation/New York Times Medical Bills survey found. 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 your unpaid medical bills into a single loan. You can do so using a personal loan, a home equity loan or a 401(k) loan. Consider the pros and cons of each option below.

Personal loan

Personal loans are lump-sum loans that can be used to pay for virtually anything, including medical bills — you can even repay many 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.

Since personal loans are unsecured, lenders rely heavily on your financial background to determine eligibility and interest rates. Borrowers with a high credit score and a low debt-to-income ratio 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.

Pros Cons
  Break your bill into smaller payments. This gives you more time to pay off your debt.

  APRs and payments are fixed. You’ll pay the same amount each month until the loan is repaid.

  No collateral is required. Unsecured personal loans don’t require collateral, so you don’t risk losing property.

  You’ll pay interest. Many medical providers offer interest-free payment plans.

  APRs can be high for some borrowers. The lowest APRs are reserved for consumers with excellent credit.

  You may have to pay fees. You may have to pay a loan origination fee of 1%-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.

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. However, use caution: 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.

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, however, so it’s best to do your research and shop around with multiple lenders.

It’s advised that you have at least 20% 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 67% equity.

Pros Cons
  You’ll break your bill into smaller payments. This gives you more time to pay off your medical debts.

  APRs and payments are fixed. You’ll pay the same amount each month until the loan is repaid.

  APRs are lower than personal loans. This makes home equity loans a cheaper option for repaying medical debt.

  You’ll pay interest. Many medical providers offer interest-free payment plans.

  Your home is used as collateral. If you can’t repay the loan, you risk losing the roof over your head. Plus, you need at least 20% equity in your home.

  You may have to pay fees. You’ll likely have to pay closing costs, which can cost anywhere from 2%-5% of the total loan amount.

401(k) loan

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 59 ½.  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.

Alternatively, you could 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.
Pros Cons
  You’ll have up to 5 years to repay the loan. This gives you more time to pay off your medical bill.

  Competitive APRs. The APR is typically the prime rate plus 1%.

  No credit check required. This makes 401(k) loans alluring to borrowers with bad credit.

  You’ll pay interest. Many medical providers offer interest-free payment plans.

  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.

  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.

3 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
  2. Ask about payment plans and other hardship programs
  3. Enroll in a debt management plan through a credit counselor

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. More than half (57%) of consumers who attempted to negotiate medical debt were successful in lowering their bill, according to a 2018 Consumer Reports survey.

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.
Tip: Never agree to a payment plan or discounted rate if you can’t afford the payments. Doing so could result in your medical bill ending up in collections, which can have a variety of negative consequences like a decline in your credit score.

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
1 $12,880
2 $17,420
3 $21,960
4 $26,500
5 $31,040
6 $35,580
7 $40,120
8 $44,660
*FPL for every state except for Alaska and Hawaii as of Jan. 2020

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.

Tip: Depending on the state in which you live, you may be able to sign up for Medicaid and have your medical bill paid retroactively after you’ve received medical care. For more information about Medicaid eligibility, visit Medicaid.gov.

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.

Tip: Do your research before enrolling in one of these plans, as for-profit debt settlement companies may advertise their services as “debt management.” Make sure your credit counselor is accredited by checking on the U.S. Department of Justice website.

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, then they may 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’s still possible. If you’re successfully sued over the debt, your wages may be garnished to repay it.

What is the minimum monthly payment on medical bills? It’s a common misconception that you can make a minimum payment on your medical bills to avoid consequences, but there are no federal regulations that set minimum payment for repaying medical debt. Instead, your provider will decide how much you need to pay.
 

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