If you are looking for a loan to cover the expense of an urgent medical procedure and you see a creditor offering “financing at zero-interest for a year,” the chances are high that you will be interested. Taking this loan gives you an opportunity to pay for your treatment quickly, and over the coming months, repay at your convenience and without paying any interest on the principal.
On the surface, this seems like an excellent deal. But is it? Or is there more to zero-interest loans than meets the eye? Find out more below:
How interest-free medical loans work
The creditor assumes all the risk by providing applicants with upfront access to the funds they need to pay for their medical treatment. This arrangement works well for both the hospital and the patient; the hospital can provide care without worrying about debt collection. The patient, in turn, gets to break down a large bill into more affordable monthly payments.
The loan provider also offers a promotional period during which the loan must be repaid in full; this could be 6, 12, 18, or 24 months (depending on pre-agreed terms). If you can complete repayment within that timeframe, you only pay back the principal, interest-free. However, if full payment is not completed before the promotional period elapses, you’ll have to pay the principal plus interest accrued in retrospect.
For example, let’s say you take out a loan of $1,200 (at 26.99% APR) with a promotional period of 6 months to cover the cost of a procedure. Now, from the time you accepted the loan, interest (at 26.99%) is being accumulated on the principal If you pay off the $1200 within the first six months, you are free and clear.
If, however, by the seventh month, you failed to pay off the entire $1200, your balance becomes ‘what is left unpaid from the $1200 + the interest accumulated over the past six months’. Moving forward, until the loan is fully repaid, an interest of 26.9% will be charged annually.
Cons of interest-free medical loans
Here are some reasons why applying for an interest-free medical loan may not be a good idea:
They charge higher APRs than regular credit cards or loans. However, many applicants do not notice the interest rates because of the promise of zer0-interest financing.
Some medical loan providers will cancel your promotional period immediately if you are late on just one payment.
Credit cards: to cover the cost of your medical treatment, you may apply for a credit card with fixed monthly payments that ensure you pay off your debt within the stipulated term. You may even enjoy a 0% APR introductory period, and if you miss a payment, you incur a small fee as a penalty. Of course, you need a good credit score (680 and above) to get a card that offers all these benefits.
Creditors give loan recipients an option to pay a minimum monthly payment
but if only minimum monthly payments are made the principal will not be paid off within the stipulated timeframe. For example, if you collect a loan of $1,200 with a promotional period of 6 months, your minimum monthly payment will be set at approximately $36 per month. If you adhere to this payment schedule, after the 6th months, you will have a balance of $984 left unpaid.
By the 7th month, retrospective interest from the past six months will be calculated and added to the principal. So, despite having paid $216, the loan recipient will have an unpaid balance of $1,136. If you stick to the minimum monthly payment schedule until the balance is paid off, you end up paying $2,693 and it will take 96 months to do so.
All things being equal, you should be able to pay off $1,200 within six months. But what if an unexpected financial challenge comes up during the loan term and you miss a payment? Or worse, you unsuspectingly adhere to the minimum payment schedule, and you end up paying over $1400 in interest over eight years?
How Interest-free medical loans compare with 0% APR introductory period
When people see a medical loan provider offering zero interest for a promotional period, they often mistake it for a similar offer given out by regular credit card companies. However, there is an important distinction; with credit cards, when the introductory period elapses, cardholders only have to pay interest on their unpaid balance. For example, if you buy an item worth $1,500 using a new credit card with a 12-month introductory period at 0% APR, you make interest-free payments on the principal during the first 12 months. After the introductory period, interest is charged only on the balance that is left unsaid.
More customer-friendly alternatives
In place of a zer0-interest medical loan, here are a couple of other options that offer better terms and better value to customers.
Personal loans: Banks, credit unions, and online lenders offer personal loans for medical procedures. They also require good credit and the higher your score, the better the loan terms.
United Medical Credit:if you have a credit score that is less than perfect, then you can’t do better than a medical loan from United Medical Credit. We provide financing for a wide range of medical procedures, and our rates compete favorably with the best in the market. Applicants stand to get up to $35,000 in funding with monthly payments that are affordable and well-structured. No lender offers as many benefits as United Medical Credit, especially to people that don’t have excellent credit.
While a deferred interest medical loan may sound like a great idea, the more you learn about their terms, the more you realize that the cons outweigh the pros. The question at the beginning was “do you really need it?”. With options like United Medical Credit on the table, you have much better choices available to you; therefore, the answer is “No.”