Some expenses – such as utility bills and car payments – are relatively easy to budget and plan ahead for. Medical expenses, on the other hand, often arise quite suddenly, and can be far more difficult to anticipate, and pay for. Even for someone with good health insurance coverage, the out-of-pocket costs for an emergency appendectomy, an artificial knee replacement or even a routine root canal can often be enough to drain their entire savings and leave them with hefty debts long after their treatment is completed.
Unpaid medical debts, in turn, often result in poor credit scores, which can saddle consumers with higher home mortgage payments for years to come or prevent them from borrowing to buy a car or start a business.
Medical costs have been growing faster than most Americans’ incomes for so long now that, according to recent surveys, more than half of all U.S. consumers can’t afford even $500 to pay for unexpected medical bills or other expenses. No wonder then, that so many of us are looking for better ways to manage, and repay, our rising medical debts.
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Mountains of medical debt
A Kaiser Family Foundation survey last year found that 29 percent of Americans were struggling to pay their medical bills, causing them to spend less on food, clothing and other basic living expenses to make ends meet. About one-fourth of those surveyed said that their medical bills also have caused them to postpone getting recommended health care, medical tests or prescriptions filled. Not surprisingly, the problem is worse for those with lower incomes. A recent Federal Reserve report on the economic well-being of U.S. households found that nearly 40 percent of families with annual incomes less than $40,000 went without at least some medical treatment last year.
The U.S. Consumer Financial Protection Bureau (CFPB) reported that in 2014, 43 million Americans had overdue medical debt on their credit reports, and that a staggering 52 percent of that debt was from medical expenses. Sen. Dick Durbin (D-IL) – who recently co-sponsored legislation to prevent medical debt from continuing to damage consumers’ credit scores after it has been paid off or settled – contends that “The number one reason for personal bankruptcy in America is medical bills.”
Those who work for large companies and in the public sector are more likely to have their medical expenses covered by health insurance, although they may still incur significant medical debts. But even though more Americans have been able to get insurance coverage since passage of the Affordable Care Act in 2010, millions of others who are self employed, unemployed or work for small businesses still lack affordable health insurance. And for those without adequate health insurance, the important question after a major illness or accident is not whether they will end up with significant medical bills, but what’s the most affordable, least painful, way to repay the resulting debt.
Costly credit cards
When a big medical bill arrives, it’s tempting to simply pull out your trusty credit card and charge it – or at least as much of it as your credit limit will allow. Most people can’t afford to immediately pay off their entire credit card loan balance, however, and instead end up repaying substantial medical debts over a period of months, or even years. And unfortunately, carrying a large credit card balance month after month can add thousands of dollars in interest charges to the eventual cost of the loan.
Credit cards tend to be one of the most expensive forms of loans for medical expenses. According to Bankrate.com, credit card interest rates have been averaging about 17 percent annually for borrowers with strong credit ratings, but can easily reach as high as 24 percent for those with less impressive credit scores. Other alternatives, such as personal loans for medical bills, offer annual interest rates starting as low as 5 percent (although interest rates for riskier borrowers can be much higher).
Repayment alternatives
Before you resort to charging medical debts to your credit card, consumer finance experts suggest you explore some of the following alternatives, including:
• Go direct. Some doctors or hospitals are willing to set up direct repayment plans – sometimes interest-free – for patients without adequate insurance or who are unable to pay their bills immediately. Although most medical practices prefer not to be in the lending business, direct payment plans can sometimes reduce their costs of dealing with insurers or turning unpaid debts over to credit agencies for collection. Just be sure before agreeing to a direct repayment plan that both parties are clear about the terms and conditions, and what will happen if you fail to make your agreed-upon payments.
• Home equity. Homeowners with sufficient equity in their home may be able to use a home equity loan or home equity line of credit (HELOC) to pay off their medical bills. Most home equity loans offer a fixed interest rate and repayment schedule for a specific loan amount, while HELOCs usually have variable interest rates and allow borrowers to draw funds when needed from a pre-approved credit line. Before choosing either of these options, be sure you understand the difference between the two kinds of loans. And remember that both are secured by the equity in your home. So if you fail to make the payments, you could lose your house.
• Personal loans. One of the most convenient, flexible ways to pay off medical debts, or to finance additional procedures such as cosmetic or weight-loss surgery, is with a personal loan. Interest rates on personal loans can vary widely, from about 5 percent to nearly 36 percent annually, depending on the lender and the borrower’s credit history. So don’t automatically assume that the best solution for you will always be a personal loan. But with generally low prevailing interest rates and available lending limits as high as $50,000, many borrowers find these loans to be a good option for combining multiple medical bills into a single, easy-to-manage monthly loan payment.
Personal loans have become increasingly popular for debt consolidation, especially among consumers who can sometimes cut their interest payments in half by refinancing high-interest-rate credit card debt into a lower-cost, fixed-rate loan. Personal loans can also be used to pay for medical or moving expenses, home improvements or a variety of other purposes. And since most lenders don’t ask borrowers what they plan to do with the loan proceeds, these loans really are “personal.”
Unlike other kinds of credit, personal loans do not have to be “secured” by the collateral value of a home or car. Conventional lenders usually require some form of security that can be recovered if borrowers fall behind on their loan payments. Personal lenders, on the other hand, evaluate loan requests based strictly on applicants’ financial criteria, such as credit score, income and cash flow.
Best of all, because most borrowers apply for personal loans online and there are no security asset values to be verified, personal loan applications tend to be processed fairly quickly. Many personal loans, in fact, are reviewed and approved in less than a day.
So if you’re one of those struggling to afford medical treatment or to pay off accumulated medical debts, consider a personal loan, before you pull out a credit card and start racking up unnecessary interest expenses.