You have a medical emergency in a family and need funds to settle a hospital bill. You have tried other options but those have not materialized. You are planning to take a personal loan. A friend tells you about the concept of medical loan. You are told that the interest rate on a medical loan will be much lower than the rate of interest on a personal loan. This gets you interested. You want to find out more about medical loans, how such loans work and how you can apply for such loans. More importantly, you want to understand how you can get a medical loan at a lower rate of interest as compared to a personal loan.
How Is Medical Loan Different from a Personal Loan?
The difference is in the way the loan is disbursed. In case of a personal loan, the amount is disbursed to you (your bank account) and you can use the amount for any purpose, including to pay a hospital bill. In case of a medical loan, the loan is disbursed directly to the hospital or nursing home. Therefore, it cannot be used for any other purpose. You can see both the loans can be used to settle a hospital bill. In the case of personal loan, you get the money. On the other hand, in case of a medical loan, the hospital gets the money.
Clearly, the lender will disburse funds to only those hospital where it has a tie-up. Therefore, your choice of hospitals under a medical loan can be limited. For instance, the hospital where you want to be treatment at or get a surgery done may not be empanelled with the lender. Additionally, there may be limitation of the kinds of treatment for which you can take a medical loan. Please understand respective lenders may have very different policies. There is no regulatory restriction on the kinds of treatment that can be financed.
What Is the Interest Rate to Be Paid?
In terms of interest rates, do not expect medical loans to be any different from personal loans. Why should there be? However, there is an interesting angle. Since there is an arrangement between the hospital and the lender (otherwise the lender would not have disbursed the money directly to the hospital), many interesting things can happen. Since the hospital gets to drive its business because of such a tie-up, it can choose to share some of the interest cost. How?
Let’s consider an example. The treatment cost is Rs 1 lac. The lender disburses Rs 1 lac to the hospital. The hospital bears the complete interest cost on your behalf and pays Rs 10,000 to the lender (as upfront subvention or discount). It is not much different from interest subvention schemes offered by the builders. From your standpoint, you merely need to return the principal amount back to the lender over the loan tenure (say Rs 16,667 per month for the next 6 months). For you, it is a Zero-percent EMI. From the perspective of lender, it has got its money back with interest. And hospital gets the business. Everybody is happy.
What Is the Caveat?
When it comes to such lucrative offers, you need to look beyond. We have already discussed in an earlier post how even Zero-percent EMI deals can be quite lucrative for the lenders. As discussed in that post, from the perspective of the lender, some part of the cost can be borne by the hospital. Additionally, the processing fee and the upfront payment of a few EMIs (advance EMIs) bring down the effective loan amount for the lender. Let’s understand this with the help of an example.
| 1 | Cost of Treatment | 1,20,000 |
| 2 | Medical Loan Amount | 1,20,000 |
| 3 | Processing fee (2% +18% GST) | 2,832 |
| 4 | EMI (Zero-cost) | 10,000 |
| 5 | Loan Tenure (months) | 10 |
| 6 | Upfront EMI to be deposited (2 months) | 20,000 |
| 7 | Effective Loan Amount (1)-(3)-(6) | 97,168 |
| You need to be pay Rs 10,000 for the next 10 months | ||
| 8 | Rate of Interest (Monthly) | 0.53% |
| 9 | Rate of Interest (Annualized) | 6.31% |
6.31% p.a. is not a bad rate of interest from your perspective. However, there is another important point. Since the hospital is offering discount/interest subvention to the lender, there could be a tendency to escalate the treatment cost. After all, the discount is affecting hospital margins. Quite possible, the treatment would have cost you a bit less if you had agreed to pay from your pocket.
If the hospitals are sharing part of the cost through upfront subvention or discount, you have a rationale for why the interest rate for the medical loan can be lower than the interest rate for a plain vanilla personal loan. It is not always that you will get a Zero-percent medical loan. However, a loan at 6-7% p.a. also looks like a very good deal. The devil, as they say, lies in the details. You need to dig into the numbers to assess the real cost. As you can see from the above example, Zero-percent EMI cost you 6.31% p.a. We did a post on How a 4% loan can cost you 11%. This one is unlikely to be any different.
What Is tenure of such loans? I checked out a few websites (mostly fintech firms). The loan tenure ranged from 6 months to 4 years. Be prepared for a short tenure.
Where do I apply for a medical loan? I did some research. As I understand, these loans are currently being provided by a few fintech firms. You can check out the websites of LetsMD and Arogya Finance. You can go through the eligibility conditions on their websites.
How do I apply for a medical loan? You can apply directly with the lender. A few lenders may also provide online application forms. You may also be able to apply directly through the partnering hospital.
What are the documents needed to apply for such loans? Again, the documents required have to be no different than a personal loan. Be prepared with your KYC and income documents. Since the money is disbursed directly to the hospital, you may need to upload/provide a few medical documents too. Your CIBIL score may also play an important role in getting your loan sanctioned. After all, a medical loan is an unsecured loan. The lender needs some comfort before disbursing the money.
Should You Go for a Medical Loan?
If there is no other option, you have to go for a loan. The choice before you is whether to go for a medical loan or a personal loan. Assess the true cost of a medical and compare that with the cost of a personal loan. If the medical loan is cheaper, go ahead. However, you have to ensure that the hospital does not overcharge you just because you have a medical loan. And this is a serious possibility. Almost all of us have heard stories of how hospitals tend to inflate medical bills if you have health insurance.
Further Reading. Economic Times: How much do “no cost EMI medical loans” really cost?