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College is a major expense. Even with years of thoughtful saving and planning, the costs can add up quickly. Prepaid college plans are one option families are choosing to work out a smoother financial process for students and parents alike. These plans used to be more readily available in the past. Still, it’s worth looking at prepaid college plans, where you can get one, and whether they’re a smart financial decision.

What Are Prepaid College Tuition Plans?

If you have a student who definitely plans on going to college someday, a prepaid college tuition plan can help set them up for success. You, as a parent, guardian, or relative, can start paying for college now, long before the student actually attends. This locks in the current tuition rate. Even as tuition costs go up in subsequent years, these plans allow you to keep paying the tuition rate you initially locked in.

You can think of it as a loan of sorts. You pay up front, and the state earns money off of those payments. When it comes time for your student to attend college, the state pays the tuition out of the funds you provided.

Of course, you need to be confident in your student’s plans for this to work. You will probably need to live in the same state as the college the student will attend since these plans tend to apply only to in-state tuition.

Pros and Cons of College Prepaid Plans

Obviously, locking in a lower tuition rate can be a tremendous financial benefit. With college costs constantly on the rise, a prepaid tuition plan offers the potential of a steep discount. And you might even enjoy some tax breaks if you choose this approach, such as a deduction based on your contribution to a prepaid plan, depending on where you live.

However, this sort of plan can be somewhat inflexible. You may be limited in the choices you have in terms of schools. While you can get a refund if your student chooses a different school than you all expected, you may end up feeling some pressure to stay the course when investing in a plan like this.

And you can’t use the money freely. There are restrictions to how you can use the funds in a prepaid college plan. For example, room and board probably aren’t covered. These plans generally focus specifically on tuition and fees.

Despite this, many choose prepaid college plans to lock in a rate. They also enjoy the high contribution limits and tax benefits. Here are the major pros and cons of these plans.

Pros	Cons
Steady tuition rate	Lack of flexibility
Tax breaks	Eligibility limitations
High limits	Lack of control

Prepaid College Plans vs 529 Program

College prepaid plans and 529 college savings plans are similar. They serve the same basic function. However, when you look closer, they can be quite different. Prepaid tuition plans are a type of 529 plan, in fact, but 529 savings plans have distinct features that might sway your decision about investing in one or the other. Here are three of the biggest differences.

	Prepaid College Plan	529 Savings Plan
Timeframe	You must start investing within a certain time period. Different states will have different rules about this.	You can generally invest whenever you like.
Flexibility	These plans are less flexible. You generally have to spend the money on tuition and fees specifically.	You have more flexibility in how you spend your money here. You can use funds for books, room and board, and other expenses, as well as tuition.
Risk	These plans are stable. However, they won’t earn much over time. If your student changes their mind and you withdraw the money, expect to break even. These plans aren’t risky, but they aren’t going to earn much either.	This is an investment. It could earn far more than a prepaid plan, but it does involve stock investments.

The National Prepaid College Plan

While many prepaid college plan options are state-run, there is also a national program called the Private College 529 Plan. Unlike other prepaid college plans, there’s no state residency requirement to join this plan. It applies to nearly 300 colleges and universities. However, they are all private institutions, not public. They span 30 states plus the District of Columbia.

The national plan offers a bit more flexibility than state plans, and you don’t need to choose a school to start saving. That decision can wait until your student is actually enrolling, in fact. As long as it’s one of the private institutions that are part of the plan, you can use your funds there.

Recommended: How to Start Saving for Your Child’s College Tuition

States With Prepaid College Plans

Only nine states still have prepaid college plan options, and each state will offer something a little bit different. You can compare all of the options below to see if any of these state plans work for you.

State	Plan	Features
Florida	Florida 529 Prepaid Plan	The child must be a Florida resident. This plan covers tuition and fees and you can opt into a one-year dorm plan as well. Florida lets you use this plan nationwide and it’s guaranteed by the state so you won’t lose money.
Maryland	Maryland Prepaid College Trust	You can start by prepaying for just a single semester. This plan also works for out-of-state tuition. And it offers an income tax deduction for Maryland residents.
Massachusetts	Mefa U.Plan	You can contribute the full cost of tuition and fees to this plan, which is invested in bonds. You can transfer the funds or cash out and receive your investment plus interest if your plans change.
Michigan	Michigan Education Trust	Michigan offers a discounted, age-based pricing structure. Plus, you can transfer the funds to other family members. The funds work at in-state, out-of-state, and even trade schools.
Mississippi	MPACT	You pay a lower monthly rate for younger children when you enroll in this plan. You have to use the funds on tuition and fees, but anyone can contribute to the plan.
Nevada	Nevada Prepaid Tuition Program	There are some eligible out of state and private institutions that qualify under this plan. The student must use the funds within six years of graduating high school.
Pennsylvania	PA 529 Guaranteed Savings Plan	This plan only applies to state universities. However, you can also use it for up to $10,000 at elementary and secondary public, private or religious schools. You can alter your contribution levels at any time by changing your tuition level.
Texas	Texas Tuition Promise Fund	Save for public colleges and universities in Texas with this plan, excluding medical and dental institutions. You must enroll between September and March.
Washington	Guaranteed Education Tuition	You can use your funds on schools nation-wide. You can even use the funds for room and board, books, computers, and other expenses. As long as you use the funds for higher education, they won’t be subject to tax.

Are Prepaid College Plans Tax Deductible?

It depends on the state and plan, but in many cases, yes! There may be stipulations, though. For example, you’ll probably have to use the funds for higher education only. However, withdrawals for educational purposes may be tax-free. Moreover, your contributions to the plan could earn you deductions.

Are Prepaid College Plans Worth It?

That depends on where you live and what your student’s goals are. If the future is pretty certain, or you live in a state with a very flexible plan, a prepaid college plan can be a safe, stable way to save up money for college.

Because of the limitations and lack of flexibility, though, it may not be right for everyone. If, for example, you want to be more aggressive about your college planning, a 529 savings plan might suit your goals better. Plus, you can spend that money on things beyond just tuition and fees.

Recommended: Parent PLUS Loans vs Private Parent Student Loans for College

Alternative Methods for Prepaid College Plans

Beyond a prepaid tuition plan, you can also try a college savings plan to build up cash for college. This allows you to save up money and spend it on qualified education expenses. It doesn’t lock in a tuition rate, but because it’s a more aggressive type of savings plan, you could end up saving up more money in the long run.

There is also a national option. This plan applies even in many states that don’t have their own prepaid tuition plans. It also locks in rates, but you will have to choose one of the schools covered by the plan. Luckily, there are almost 300 to choose from.

Of course, if your child is headed to college in the next few years, you may not have time to save much money. Parent PLUS loans can help. When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.

The Takeaway

The thought of large student debt scares off many who would otherwise attend a college or university. But with some strategic and long-term planning, college can fit in the budget. You can mix and match approaches to find what works for you. For example, you could combine a prepaid tuition plan with a private student loan to pay for college. No matter what you ultimately choose, it will help to start planning well in advance.

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Photo credit: iStock/dangrytsku

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Once you begin looking for financing options, you may find your search leads you to multiple forms, including personal loans. One choice available to prospective borrowers is a short-term loan.

A short-term loan is a personal loan that can help with personal financial needs. But this type of loan may not fit every situation since it typically only provides limited funds. Read on to find out whether a short-term loan may help you meet your financial goals.

What Is a Short-Term Loan?

When you take out a short-term loan, you borrow funds to address immediate financial needs for a limited period. These loans serve a variety of functions, depending on your situation. For example, individuals may take out a short-term loan to keep them afloat until their next paycheck.

Or, someone running their own business who needs to cover small expenses may take out a short-term business loan.

Recommended: What Is a Personal Loan?

How Do Short-Term Loans Work?

Essentially, short-term loans operate on a short time scale. The approval process and repayment schedule occur quickly, usually within a year.

Average personal loan interest rates range from 5.99% to 36% APR, depending on the applicant’s creditworthiness. Short-term loans tend to be near the higher end of this scale, in addition to fees and penalties that may be charged by a lender.

However, lenders such as banks or credit unions offer varying personal loan terms and rates. So, it’s important to research and shop around before you apply for one.

What Can You Use a Short-Term Loan for?

Short-term loans can be used for many purposes when you need quick access to money and your cash flow is low. You can use the funds from a short-term loan to cover unexpected costs such as medical bills or for everyday expenses until you reach your next paycheck.

Businesses might use short-term loans in the form of merchant cash advances so they can replenish inventory or purchase new equipment even when short on cash. In this scenario, the business receives a lump sum of cash from a lender and repays it with a percentage of credit or debit card sales until the advance is paid in full.

Recommended: What Are Personal Loans Used For? And How to Apply

Example of a Short-Term Loan

A bank overdraft can be considered a short-term loan the bank provides when your account balance isn’t sufficient to pay for a purchase you’ve made. In this scenario, your account lacks funds to make a payment, but the bank lends you that money. In return, you pay a fee.

How Long Is a Short-Term Loan?

Every loan varies based on the lender and applicant. Often, short-term loans mature within a year or less. However, it is possible to find one that extends up to two years. Any loan term longer than that qualifies as either a medium-term or long-term personal loan.

Characteristics of Short-Term Loans

Short-term loans have unique features, such as:

•   Smaller borrowing amounts compared to other loans.

•   Typically offered as unsecured loans.

•   High annual percentage rates (APRs).

•   Short repayment periods.

•   Sometimes weekly payments are required.

Benefits of a Short-Term Loan

Short-term loans come with certain disadvantages, mostly due to their high interest rates. But they can be helpful if you find yourself in a tight spot. Some benefits include:

High Approval Rates

Since short-term loans only provide limited funds, the lending requirements may be easier to meet. Because of that, more applicants have a chance of approval. Even though you may not need a stellar credit score, you may still have some trouble if you have a low credit score. Your lender may ask for proof of a steady income, among other criteria.

Online Application

Short-term loans are also easy to access. Lenders often offer online applications, so there’s no need to visit a brick-and-mortar office. Applications are typically easy to fill out, taking only minutes to complete.

Quick Access to Funds

The short-term loan processing time is typically fast. As a result, you will probably receive approval and loan proceeds faster than you would for a long-term loan. So they might be a good option if you have an unexpected expense you need to pay as soon as possible.

Lower Accrued Interest

While short-term loans can come with high interest, they generally have a short time frame. Because of that, there are fewer total interest payments. As long as you pay on time, you could save money on built-up interest with a short-term loan.

Credit Score

As mentioned above, you don’t typically have to have an excellent credit score to get approved for a short-term loan. Applicants with average credit scores may also be able to usually qualify for a short-term personal loan.

Unsecured Personal Loan

When it comes to the difference between a secured vs. unsecured loan, a secured loan means more risk on the borrower’s part. That’s because a secured loan requires collateral, such as your car or your home. But most lenders don’t require collateral for a short-term personal loan because it doesn’t carry enough risk.

Recommended: Using Collateral on a Personal Loan

Disadvantages of a Short-Term Personal Loan

While short-term loans are easier to qualify for, they may not be the right choice for everyone. Here are some drawbacks to be aware of:

Lower Limit

For borrowers who need a significant amount of money, a short-term personal loan may not be the right choice. The borrowing limits for these types of loans tend to be small, sometimes just a few hundred dollars, to make it easier to pay off in a short amount of time.

May Lead To Cycle of Debt

Because of the high-interest rate and steep fees attached to short-term loans, they really aren’t long-term solutions. They might be an option in an emergency but can lead to a cycle of debt if relied on too often.

Types of Short-Term Loans

There are a few variations on the short-term loan available to you. The type of personal loan you apply for will generally depend on the amount of cash you want and how quickly you need it. Here are some worth considering:

Payday Loans

A payday loan is a short-term loan that some people use to tide themselves over financially until their next paycheck. The funds are meant to be repaid at the time of the borrower’s next payday — thus, the name. However, payday loan issues arise if the borrower can’t repay the loan in the short time frame required.

Installment Loans

Installment loans give borrowers a way to access a lump sum of money that’s repaid in monthly installments over a set time frame. A fixed-rate loan with steady monthly payments makes budgeting during the repayment period more convenient.

Lines of Credit

A line of credit is similar to a credit card. You receive a credit limit and can tap into the line of credit as needed. Funds can be taken out in installments of the amount needed at the time they’re needed. But you can’t surpass your limit, which the lender bases on your creditworthiness.

Recommended: Personal Loan vs Personal Line of Credit

Merchant Cash Advance

Merchant cash advances are used by businesses that make mainly debit or credit card sales. As a means to secure cash, the business will borrow a lump sum, which is advanced against the business’s daily sales. The lender is then repaid through a certain percentage of the business’s daily sales.

Invoice Financing

Similar to merchant cash advances, invoice financing is a type of short-term loan that can help business owners meet financial needs. The business submits unpaid invoices, i.e., accounts receivable, to a lender as collateral. The lender charges a fee for the financing and can collect on the invoices if the borrower defaults.

Short-Term Loan vs Long-Term Loan

It’s always important to explore your options. Short-term loans probably aren’t the right option if you need a large amount of funds in a lump sum or will need to periodically draw small amounts from a set amount of credit. In these situations, a long-term loan might be a better solution.

Long-term personal loans can sometimes have high-interest rates depending on the applicant’s credit score and other factors used by the lender. They may not require collateral, which makes them seem risky to lenders.

Here’s a breakdown of how these two loans stack up against each other:

	Short-Term Loans	Long-Term Loans
Loan Amount	Typically, a few hundred to a few thousand dollars, but can be up to $100,000	Depending on the lender, amounts can be a few thousand dollars to $200,000 or more
Loan Term	A couple of weeks to 18 months	Up to 25 years
Interest	High interest rates	Competitive interest rates
Eligibility	May qualify with bad credit	Stringent qualifications such as good credit

Typical Requirements to Get a Short-Term Loan

Requirements to be approved for a short-term loan vary by lender, but all lenders will evaluate your creditworthiness in some way. Generally, a higher credit score will likely secure you better terms and interest rates. You also need to be able to show your lender a range of personal and financial information such as proof of identity, verification of employer and income, and proof of current address.

Can I Get a Short-Term Loan With Bad Credit?

While short-term loans don’t typically require excellent credit, the higher an applicant’s credit score, the better their chances of approval. A lender may also offer more favorable interest rates and terms to a borrower with a higher score. Since short-term loans are often for relatively small amounts of money, requirements tend to be laxer.

Personal Loan Options From SoFi

SoFi offers personal loan options to fit a variety of financial situations and needs. With competitive interest rates and a range of terms, there may be a SoFi Personal Loan that works for you. SoFi does not charge fees on personal loans, so you only repay the loan principal and interest.

The Takeaway

Short-term personal loans vary based on your financial situation and the lender you use. Some lending institutions use high-interest rates and hidden fees that can add to the overall cost of a short-term personal loan. That doesn’t make a personal loan bad, but it’s important to be aware of what you’re agreeing to when you borrow money.

SoFi may have a personal loan that will work for your unique financial situation and needs. Checking your rate takes 60 seconds and won’t affect your credit score.^*

Research your personal loan options today

Photo credit: iStock/kitzcorner

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^*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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If you’re considering a personal loan, you might wonder what kind of impact it may have on your credit. It’s true that the application process can cause your credit score to dip temporarily, but a loan can potentially help it too.

We’ll run through all the ways a personal loan can affect your credit score, as well as when you might consider a personal loan for your financial life.

How Is Your Credit Score Calculated?

To understand how a personal loan can affect your credit, it helps to know the basics of how your credit score is calculated. According to FICO®, a company that generates credit scores, five principal components are used to calculate your FICO Score:

•   Payment History (35%): Your history of making on-time payments to lenders is a key factor, accounting for more than a third of your score.

•   Amounts Owed (30%): The amount of credit you are currently using is the second-most important factor.

•   Length of Credit History (15%): The length of time you’ve had credit accounts open, and in good standing, is also a factor. Opening new lines of credit will bring down the average age of your credit history.

•   New Credit (10%): This component considers the amount of new credit recently taken out.

•   Credit Mix (10%): This final factor takes into account the different types of credit you hold: credit cards, personal loans, mortgages, etc.

How Do Personal Loans Work?

A personal loan is a borrowed sum of money that is paid back in installments, with interest. Loan amounts typically range from $5K to $100K.

Common uses for personal loans include consolidating high-interest credit card debt, and funding large purchases such as home improvements, weddings, unexpected medical expenses, moving expenses, and funerals.

Recommended: Types of Personal Loans

Do Personal Loans Hurt Your Credit?

Any debts you have can impact your credit, so taking out a personal loan might lead to a drop in your credit score over the short term. On the flip side, there are ways for your personal loan to positively affect your credit score.

Here’s how a personal loan can impact your credit score, negatively or positively:

A Personal Loan’s Impact on Credit Score

Pros	Cons
•   Can add to your credit mix •   Could improve your payment history if you pay on time •   May help keep your credit utilization ratio in check •   No collateral required	•   Requires a hard credit inquiry •   May increase amounts owed •   Could negatively impact your payment history if you miss payments •   Fees can drive up the cost of the loan

Con: Requires a hard credit inquiry

Taking out a loan often requires a hard credit inquiry, which can adversely impact your credit score. Hard inquiries remain on your credit report for two years, though their negative effect on your score is minor (typically 5 points or less) and lasts only a year.

Con: May increase amounts owed

The “amounts owed” on your credit score may increase because you are taking on new debt. However, if you’re consolidating credit card debt, you will reduce that debt by paying it down with the personal loan — your amount owed doesn’t change.

Con: Can impact your payment history if you miss a payment

If you miss a payment on your personal loan, that can negatively impact the “payment history” component of your credit score. That factor specifically looks at whether you make your debt payments on time.

Con: Some lenders charge fees

Fees can drive up the cost of a loan, beyond what you’re paying in interest. For example, an origination fee, which lenders charge upfront, is typically a percentage of the principal. And prepayment penalties discourage borrowers from paying off their loan early. (SoFi never charges any fees.)

Pro: Can add to your credit mix

Having a new loan type (and paying it back on-time) can positively impact the “new credit” and “credit mix” components of your score.

Pro: Can improve your payment history if you pay on time

Making on-time payments and showing responsible management of a personal loan is a nice checkmark for the “payment history” part of your credit score.

Pro: May help you keep your credit utilization ratio in check

If you’re using a personal loan to reduce credit card debt, it replaces revolving debt (your credit card debt) with an installment loan. Revolving debt is one you can continue adding to even when paying it down. An installment loan involves borrowing one specific amount and repaying it in — wait for it — installments. Because you won’t be able to add further debt to your installment loan, it may help you keep your credit utilization ratio under control, which can be a good thing for your credit score.

Pro: No collateral required

Loans can be either secured or unsecured. A secured loan is one that requires the borrower to put up collateral, such as a car or home. An unsecured loan requires no collateral.

When To Consider Taking Out a Personal Loan

There’s not a clearcut answer to whether a personal loan can hurt your credit, because everyone’s financial situation is different. But here are some instances when a personal loan may be appropriate:

•   You’re consolidating high-interest debt

•   You have an emergency expense you can’t otherwise afford

•   You’re paying for a home improvement project that will add value to your home

•   It’s your least expensive borrowing option

•   You don’t have any collateral to offer

Before you take on any debt, it’s always important to consider whether it’s really necessary and what other ways you might cover your costs. For instance, it’s often not recommended to take out a personal loan to pay for a vacation when you can scale back on your travel plans or simply wait until you’ve saved up enough money. It’s obviously a very different story if you have to cover the cost of a medical emergency.

Consider whether you can afford to make the payments on time. And make sure you understand the total cost of the loan, with interest and any fees added in. Also think about whether your credit score is high enough to qualify for competitive rates and terms, and whether it can withstand any dips applying for a loan might cause.

Recommended: How To Get Approved for a Personal Loan

The Takeaway

Applying for a personal loan requires a hard credit inquiry, which typically dings your credit score by around 5 points. But overall, as long as you don’t borrow more than you can pay back, and you make all scheduled payments on time, a personal loan can have a positive impact on your credit score over the long term. A personal loan can add to your credit mix, and will improve your available credit if you’re using it to pay off high-interest credit cards.

Shop around for the best personal loan offers for you. SoFi’s personal loan calculator can show you what your monthly payment might be in different scenarios. SoFi can give you a rate quote in minutes.

With SoFi, you can check your rate in 60 seconds, and get your loan funded fast.

FAQ

Is a personal loan bad for your credit?

There’s no clearcut answer because personal loans can have a positive or negative impact on your credit score. The loan itself has less of an impact than how you manage your loan. If you never miss a payment, a personal loan can help your credit score over time. But if you can’t afford to make your monthly payments on time, that can hurt your score.

Will a personal loan affect my credit card application?

It can. If you applied for the loan recently, you may want to wait and see how your credit score is affected before applying for a credit card. A personal loan can have a positive or negative impact on your credit score, depending on your financial situation and how you manage the loan.

Will a personal loan affect my car loan application?

It can. A personal loan affects your “credit utilization,” which impacts your credit score. How much impact it has depends on your financial situation. If the personal loan is your only debt, for instance, your credit utilization might be able to accommodate both loans.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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In 2020, the average health insurance deductible was $4,364 for individuals, and a staggering $8,439 for families. (Thanks a lot, high-deductible health plans.) That’s a lot to pay upfront before insurance kicks in. What many people don’t know is that the medical bills you receive aren’t always set in stone. You may be able to work with the hospital, doctor, or ambulance service to negotiate a lower price.

We’ll explain how to research your medical bills, dispute overcharges, and negotiate a more fair and affordable price.

Preparing for Medical Bill Negotiation

Save Your Explanation of Benefits

Soon after you’ve received medical care, you should receive an explanation of benefits (EOB) from your insurance company. It may look like a bill, but it isn’t — it’s a breakdown of the following:

•   Medical services you were provided

•   What the doctor or hospital charged

•   What your insurance covered (and didn’t cover)

•   How much your insurance agreed to pay

•   The amount you’re expected to pay

The EOB can help you be sure you’re receiving the full benefits to which you are entitled under your insurance plan. And it can be useful to compare the information your insurance company has to the actual bill(s) you receive. Your EOB may even offer a better description of the services you received than what’s on your medical bills.

If your EOB seems incomplete, it may be because it doesn’t reflect the most recent charges or payments. If you’re confused or suspect an error, call the number listed on the EOB to get help.

Be sure to save your EOB when it comes in the mail, or download it when you receive an email that it’s ready. You may need it when you speak to your insurance company or doctor.

Recommended: Types of Personal Loans

Be Clear About Who’s Billing You

One visit to the emergency room can result in multiple medical tabs. You might be billed by the ambulance, the hospital, and the specialist who saw you.

Adding to the complexity, the invoice you receive may come from a doctor or hospital’s internal billing department, or it might come from a company that’s been hired to handle all invoicing and payments for a hospital, doctor, or group practice.

To avoid mix-ups, carefully track who sent each bill as it arrives, note if the billing was outsourced or done in-house, and mark down who you talked to about errors or making payments. Don’t forget to keep a copy of your EOB with those statements (either paper or digital) so you’re always prepared with the right information.

Don’t Delay Getting Help

As soon as you realize there’s a problem with a bill — either because it’s incorrect or it’s just too high for you to manage — get in touch with the provider who sent it.

As long as your debt remains with the original service provider, medical bills won’t show up on your credit report. But if the bill goes to collections, it can affect your credit score. You may also have fewer options for negotiating once the debt goes to collections.

Ways To Negotiate a Medical Bill

Can you really negotiate medical bills? Absolutely, and there are a few different strategies you can adopt when talking down healthcare costs. If one tactic fails, don’t give up — simply move on to another. The most effective method for negotiating a hospital bill may depend on your situation and the doctor. Here are a few to consider:

Dispute Any Errors

Errors on medical bills are surprisingly common. Look for things like duplicate charges, charges for procedures that didn’t happen, errors in your insurance information, mistakes regarding whether a provider was in-network or out-of-network, and misstated quantities of medications and supplies.

Billing codes for diagnoses and treatments can also be entered wrong, which can confuse the insurance company and slow down or stop payment on a bill. If you suspect your bill was miscoded (and you’re feeling motivated), you can look them up online. There are two different databases:

•   Diagnosis codes, called ICD codes (for International Classification of Diseases) can be found on the Centers for Disease Control website.

•   Treatment and service codes, called CPT codes (for Current Procedural Terminology), are available on the Centers for Medicare and Medicaid website. Just accept the usage waiver, and a spreadsheet of codes will download automatically.

A billing representative can answer almost any questions you have regarding your bill, so don’t hesitate to ask what certain line items are. If you catch any errors that inflate your bill, you may want to file a dispute to get the charges reduced or eliminated.

Offer To Pay a Lump Sum

Many hospitals prefer to get a slightly lower payment at the time of billing than wait for a bill to drag through collections. You can offer to pay the bill immediately — ideally in cash rather than by credit card — if the provider will accept less than the total amount due.

A good rule of thumb is to start high when suggesting a discount, leaving room for the provider to negotiate downward. It’s perfectly reasonable to start by requesting a 50% discount. Even if you don’t pay the entire bill at once, ask whether the provider offers a self-pay discount for those paying out-of-pocket.

Show Evidence of Overcharges

This is where doing your homework comes in handy. If you can show evidence that you were charged more than the average price points in your area, you may have leverage for requesting a discount on your bill. Besides checking online resources and calling competitors, you can also cite the amount Medicare allows for the service. Frame your request as a desire to pay what is “usual, customary, and reasonable”

Negotiate a Payment Plan

Some facilities will agree to a payment plan that replaces the original bill’s due date with a schedule that’s feasible for you. See if you can sign on to a plan with zero interest. If that’s not an option, you can try asking for a lower interest rate. And just because you negotiate a payment plan doesn’t mean you shouldn’t try asking for a discount on the total as well.

Research Hospital and Government Resources

When you’re sick or recovering, online research and phone calls can exhaust your limited energy reserves. But you don’t have to go it alone. There are several resources you may be able to tap for assistance.

Hospital Help

Hospitals often offer discounts or financial relief programs, such as forgiveness, for patients whose income falls below a certain threshold and for uninsured patients. The hospital may refer to this help as “charity care,” “bridge assistance,” or simply “financial assistance.”

Even if you don’t meet income guidelines for government programs, it’s worth checking on what’s available at the hospital level.

Government Financial Assistance

If you weren’t on Medicaid but would have qualified for it when the original medical charges were generated, you may be able to get retroactive help. Depending on the state you live in, Medicaid (a federally authorized, state-administered insurance program for low-income individuals) may cover bills received up to three months before the month you apply for the program. You can check your eligibility on Medicaid.gov

Ask for an Advocate

When you need additional help negotiating with your insurance company or medical provider, consider a patient advocacy organization, such as the Patient Advocate Foundation at PatientAdvocate.org, or state or local consumer protection agency at USA.gov/State-Consumer

Come Prepared To Negotiate

If you’re new to negotiating, here are some basics that can help:

Try to Stay Calm and Polite

Do your best to keep your emotions under control while communicating with billing department representatives. Expressing your requests in a clear and collected way will make it easier for them to understand your situation and can improve the chances that the representatives you deal with will want to help. If you’re angry or despairing, cool off before picking up the phone.

Do Your Homework

You may have a better chance of succeeding if you’ve researched the average costs of the treatments you received — especially if you use data that’s specific to your area. You can find this information with a little online searching or by consulting resources like HealthcareBluebook.com

Don’t Underestimate the Power of Empathy

Explain economic or other hardships you’re facing and why you’re struggling with repayment. Perhaps you’ve recently lost your job, or you just got out of college and you’re on your own for the first time. Calling on the other person’s sense of compassion and humanity may help your cause.

Write Down Everything

Keep clear notes with the dates, names, and affiliations for every phone call you have, as well as reference numbers if applicable. It’s easy to forget what you spoke about and with whom. Keep everything in one place. And ask to receive the final details of any agreement you make in writing.

Don’t Hesitate to Escalate

Start with the contact phone number on your bill. But if the person you’re speaking with seems unwilling or unable to help, don’t be afraid to ask for a supervisor. Be prepared to explain the situation, over and over again, to each person you speak with.

If all else fails, apply a bit of pressure. While remaining courteous, state that you probably won’t use this provider or facility again if they can’t meet you halfway. Mention that you’ll share your negative experience with your network, including on social media.

What Happens If You Don’t Pay Medical Bills?

The worst thing you can do with overwhelming medical bills is ignoring them. If you don’t make a payment by the due date on your bill, what happens next depends on the laws in your state.

After a few months, if you still haven’t paid, the hospital may pass your bill on to a debt collections agency, and that agency may report the past due balance to the credit bureaus that put together your credit reports. From there, individuals with medical debt have about six months to fix insurance or billing problems.

Once that grace period is over, however, an unpaid bill can impact your credit score for years. And if a court issues a judgment in the hospital’s favor, your wages could be garnished. This means money could be taken directly from your paycheck and sent to the creditor, even without your consent.

Borrowing Money To Pay Medical Bills

Even if you use all the strategies described above, negotiation doesn’t always work. If you can’t get your bill reduced or eliminated by negotiating, there are other options, such as taking on debt by using a credit card or taking out an unsecured personal loan.

Recommended: Secured vs. Unsecured Personal Loans

Credit Card

Using a credit card to pay medical bills is not generally recommended because of their typically high-interest rates. However, if you have exhausted all negotiating tactics and are still having trouble paying your outstanding balance after the six months grace period given by credit reporting agencies, it might be better to pay the balance with a credit card than to have your account sent to collections and see your credit score drop.

Recommended: Average Credit Card Interest Rates

Personal Loan

Another option you might consider is taking out an unsecured personal loan to pay your medical bills. Personal loans interest rates can be significantly lower than those of credit cards, particularly if you have a healthy credit score. And since a fixed-rate personal loan is installment debt — in contrast to the revolving debt of credit cards — the balance is paid on a fixed payment schedule.

If you qualify for a personal loan with a manageable interest rate and monthly payment, you can use it to pay off your medical bills immediately and avoid accruing late fees or having the bill move into collections. SoFi’s personal loan calculator can help you run the numbers.

Recommended: How To Get Approved for a Personal Loan

The Takeaway

Medical bills can be stressful, especially when added to the stress of having medical treatment. But it’s best not to ignore them. Armed with the right tactics, you may be able to negotiate the amount due or get assistance to make the expense manageable.

If that doesn’t work, a SoFi personal loan can prevent medical bills from dragging you into a vicious cycle of debt. An unsecured personal loan from SoFi offers competitive, fixed rates; no fees required; and loan terms that can work with a variety of budgets.

Pay for medical costs — without sinking into high-interest debt.

FAQ

Do medical bills affect your credit?

As long as your medical bill remains with the original doctor or facility, it won’t show up on your credit report. But if the bill goes to collections, it can affect your credit score.

Should I pay a medical bill that’s gone to collections?

Yes, paying off medical collections will remove the negative information from your credit report and help you build up your credit again. Under new guidelines, paid medical collections will no longer remain on your report.

How long do I have to pay a medical bill?

Medical bills are typically due 30 days from the date of the bill. Doctors and facilities usually send several rounds of bills before turning the debt over to a collections agency. If you’re struggling to pay your medical bills, call the doctor or facility to negotiate either a lower price or a payment plan that you can afford.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Hypothecation may be a word you’ve never heard, but it describes a transaction you’ve probably participated in. Hypothecation is what happens when a piece of collateral, like a house, is offered in order to secure a loan.

Auto loans and mortgages involve hypothecation since the lender can repossess the car or house if the borrower is unable to pay.

There are, though, some more subtle details to understand about hypothecation, particularly if you’re in the market for a home loan. Read on to learn about hypothecation loans.

What Is Hypothecation?

Hypothecation is essentially the fancy word for pledging collateral. If you’re taking out a secured loan — one in which a physical asset can be taken by the lender if you, as the borrower, default — you’re participating in hypothecation. (Hypothecation is also possible in certain investing scenarios, which we’ll talk briefly about later.)

Some of the most common hypothecation loans are auto loans and mortgages. If you’ve ever purchased a car, it’s likely you have (or had) a hypothecation loan, unless you paid the full purchase price in cash.

Importantly, just because the asset is offered as collateral doesn’t mean that the owner loses legal possession or ownership rights of that asset. For instance, with an auto loan, the car is still yours, even though the lender might hold the title until the loan is paid off.

You also maintain your right to the positive parts of ownership, such as income generation and appreciation. This is perhaps most obvious in the case of homeownership. Even if you’re paying a mortgage on your property, you still have the right to lease the place out and collect the rental income.

However, the lender has the right to seize the property if you fail to make your mortgage payments. (Which would be a bad day for both you and the renters alike.)

Why Is Hypothecation Important?

Hypothecation makes it easier to qualify for a loan — particularly a loan for a lot of money — because the collateral means the transaction is less of a risk for the lender.

For instance, hypothecation is the only way that most people are able to qualify for a mortgage. If those loans weren’t secured with collateral, lenders might have very steep eligibility requirements to lend hundreds of thousands of dollars!

There are unsecured loans, however. A personal loan is a good example.

Because unsecured loans are riskier for the lender, they tend to be harder to qualify for and carry higher interest rates than secured loans.

It’s a trade-off: With an unsecured loan, you’re not at risk of having anything repossessed from you, and you can use the money for just about anything you want.

On the other hand, if comparing a car loan and personal loan of equal length, you’re likely to pay more interest over the life of the unsecured loan and be subject to a stricter eligibility screening to get the loan in the first place.

Recommended: Smarter Ways to Get a Car Loan

Hypothecation in Investing

Along with hypothecation in the context of a secured loan for a physical asset, like a house or a car, hypothecation can also occur in investing — though usually not unless you’re taking on advanced investment techniques.

Hypothecation occurs when investors participate in margin lending: borrowing money from a broker in order to purchase a stock market security (like a share of a company).

This technique can help active, short-term investors buy into securities they might not otherwise be able to afford, which can lead to gains if they hedge their bets right.

But here’s the catch: The other securities in the investor’s portfolio are used as collateral and can be sold by the broker if the margin purchase ends up being a loss.

TL;DR: Unless you’re a well-studied day trader, buying on margin probably isn’t for you and you probably don’t have to worry about hypothecation in your investment portfolio. But you should know it can happen in investing, too.

Recommended: What Is Margin Trading?

Hypothecation in Real Estate

A mortgage is a classic example of a hypothecation loan: The lending institution foots the six-digit (or seven-digit) cost of the home upfront but retains the right to seize the property if you’re unable to make your mortgage payments.

Hypothecation also occurs with investment property loans. A lender might require additional collateral to lessen the risk of providing a commercial property loan. Borrowers might hypothecate their primary home, another piece of property, a boat, car, or even stocks to secure the loan.

A promissory note details the terms of the arrangement.

Recommended: 31 Ways to Save for a Home

Is Hypothecation in a Mortgage Worth It?

Given the size of most home loans and the risk of losing the home, you may wonder if taking out a mortgage is worth it at all.

Even though any kind of loan involves going into debt and taking on some level of risk, homeownership is still usually seen as a positive financial move. That’s because much of the money you’re paying into your mortgage each month usually ends up back in your own pocket in some capacity…as opposed to your landlord’s pocket.

When you pay a mortgage, you’re slowly building equity in your home. Most homes have historically tended to increase in value.

More broadly, homeownership can help build generational wealth in your family.

A Note on Rehypothecation

There is such a thing as rehypothecation, which is what happens when the collateral you offer is in turn offered by the lender in its own negotiations.

But this, as anyone who lived through the 2008 housing crisis knows, can have dire consequences. Remember The Big Short? Rehypothecation is part of the reason the housing market became so fragile and eventually fell apart, and thus is practiced much less frequently these days.

The Takeaway

Hypothecation simply means that collateral like a house or car is pledged to secure a loan. Mortgages are a classic example of hypothecation, and hypothecation is the reason most of us are able to qualify for such a large loan.

Are you looking to buy a house or investment property? SoFi offers a range of mortgage loans with competitive rates.

It’s quick and easy to find your rate.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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