Medical Debt Consolidation: Is It a Good Idea?

Paying off multiple medical bills at once can feel overwhelming, but turning to medical debt consolidation is not always the best course of action. Most medical bills have zero interest rates, flexible repayment plans, and certain credit protections, which means that sticking with an original payment plan is often a better option.

Highlights/ Key Takeaways

• Medical debt consolidation is the process of taking out a single loan to pay off multiple medical bills, leaving you with one fixed monthly payment.
• Medical bills are not reported to credit bureaus right away, accrue no or low interest, and have multiple repayment options. Debt consolidation loans don’t have the same credit protections and often come with high APRs.
• In most situations, the original payment plan with the medical provider will be a better alternative to medical debt consolidation.
• If you are still set to consolidate your medical debt, make sure to shop around for the best rates and run the numbers to ensure that debt consolidation will improve your financial situation.

Understanding Medical Debt Consolidation

Medical debt consolidation is a type of debt consolidation applied specifically to medical bills or loans. Let us take a closer look at what medical bill consolidation involves.

What Is Medical Debt Consolidation?

Medical debt consolidation is a financial strategy that involves taking out a single loan to pay off multiple medical bills. While medical debt consolidation does not eliminate debt altogether, it can considerably simplify the process of paying off medical bills. With a single monthly payment to only one lender, you will be more likely to stay on track with your payments and eventually become debt-free.

How Does Medical Debt Consolidation Work?

If you wish to simplify your medical bill payments, you could take out a dedicated medical consolidation loan from a bank, a credit union, or an online lender. However, make sure to consider all your options before taking this step.

Unlike a traditional bank loan or credit card debt, medical bills typically don’t accrue interest and come with more flexible repayment options. While taking out a debt consolidation loan can leave you with a convenient single monthly payment, it will add interest to your payments, making your debt more expensive in the long run.

Will Consolidating Medical Bills Affect My Credit?

Most debt owed to your healthcare provider won’t be reported to the three major credit bureaus - TransUnion, Equifax, and Experian. However, if you have paid for your medical procedures with a personal loan or credit card, that debt will be classified as a regular loan or credit card debt and affect your credit report accordingly. 

The same concept applies to medical debt consolidation loans: as soon as you consolidate your medical bills with a personal loan or transfer the debt to a credit card, the account will no longer be considered a medical bill account. This means that all your activity will now be reported to credit bureaus, and debt consolidation could affect your credit.

“While taking out a debt consolidation loan can leave you with a convenient single monthly payment, it will add interest to your payments, making your debt more expensive in the long run.”

Ways to Consolidate Your Medical Debt

Common ways to consolidate medical bills include personal loans, home equity loans, and credit card balance transfers. You could also work with a medical debt relief company or a credit counselor to get assistance with managing your medical debt.

• Personal loan. An unsecured personal loan will cover your medical bills but leave you with a single monthly payment that will include high interest charges. The good news is that, because unsecured loans do not require posting collateral, you won’t be risking losing your home, car, or another asset should you fail to make loan payments.
• Home equity loan or line of credit. Home equity loans and lines of credit are based on the equity you have in your home. Most banks will allow you to borrow up to 80% of that equity, using your home as collateral. While you will get relatively low interest rates, you will be putting yourself at risk of losing your property should you fail to repay the loan.
• Credit cards. Using a credit card to cover medical debts may seem like a simple solution, but it can be extremely costly. Credit cards tend to have high interest rates to begin with, and you will need to pay an additional 3%-5% transfer fee on the amount moved to the credit card.
• 401(k) loan. A 401(k) loan allows you to borrow money from your own retirement account without an additional credit check. While it may seem like a good option, there are certain tax implications, and you will be putting your long-term financial security at risk.
• Credit counseling. Credit counselors can assess your income and medical bills and offer debt-relief solutions that will help you effectively tackle your debt. Credit counseling is often recommended for those who have used a high-interest loan or credit card to cover medical bills.

Medical Debt Consolidation: Is It the Right Choice for You?

Whether medical bill debt consolidation is the right choice for you will depend on a number of factors. However, in most cases, sticking to the original payment plan from the medical provider will be best. Why? Let us dive deeper to explore the pros and cons of debt consolidation.

Pros and Cons of Medical Debt Consolidation

While medical debt consolidation does allow you to combine multiple medical bills into a single convenient monthly payment, this strategy has more cons than pros.

Remember that most types of medical debt do not accrue interest at all, while debt consolidation loans or credit card debt do. This means that by consolidating your medical debt, you will be adding interest expenses to your monthly payments, thus increasing the total amount that you owe. 

In addition, medical debt is not reported to credit bureaus right away and has certain credit protections. As such, you have a 180-day grace period to correct any billing errors, have your insurance company cover the costs, or negotiate a payment plan. As soon as you consolidate your medical bills with a single loan, these credit protections will be lost, and the loan will be treated just like any other form of consumer debt.

When Is Medical Debt Consolidation a Good Idea?

Nevertheless, there are certain situations when medical debt consolidation is a good idea. If you have used a high-interest personal loan or a credit card to cover your medical bills to begin with, consolidating these debts into a single loan with more favorable terms can provide you with interest rate savings.

Alternatives to Medical Debt Consolidation

In most situations, negotiating a payment plan directly with the healthcare provider is your best option. That way, you will be able to receive the lowest interest rates, the most flexible repayment plans, and certain credit protections. You could even hire a medical bill advocate to examine your health care bills, look for errors or overcharges, and negotiate with the medical provider on your behalf.

Other alternatives to medical debt consolidation also exist, but these should only be considered after all else has failed:

• Medical debt settlement. Debt settlement is the process of offering a one-time payment to settle your debt for less than what was originally owed. While you will pay less on the debt itself, additional debt settlement fees will be involved, and you will be required to pay taxes on any forgiven debt.
• Medical debt management program. A debt management program will connect you with a credit counselor who will negotiate with your creditors to receive better loan terms. However, most such programs can take several years to prove successful.
• Bankruptcy. Bankruptcy should be avoided if possible, but, sometimes, it is the only solution for those overwhelmed with medical debt. Filing for bankruptcy can provide a fresh start, but it will drastically affect your credit history for 7 to 10 years.

Final Word

If you find yourself drowning in medical debt, don’t despair! Most medical providers offer convenient, low-interest repayment plans that get a 6-months grace period with credit bureaus. If it makes financial sense, medical debt consolidation is also an option, - but make sure to evaluate all pros and cons carefully before choosing this avenue.