Personal Loan vs Medical Loan vs Loan Against FD: What To Consider When Medical Expenses Outpace Insurance

Is health insurance the ultimate answer to health care-related expenses? What to do when treatment costs exceed insurance coverage. This under-discussed question remains relevant because many a time, people do have insurance coverage, but it’s not sufficient coverage. While experts suggest maintaining a personal policy even if the employer provides the insurance, people ignore it. Even if they have insurance, chances are high that the coverage is not sufficient because there is no standard coverage amount.

So, what to do when the healthcare expenses exceed the coverage, and your savings are exhausted? Should you take a personal loan, or a medical loan, break a fixed deposit (FD), or take a loan against it to meet the medical exigency? Let’s understand.

Personal Loan: Personal loans are unsecured loans that can be used for different purposes. Borrowers don’t need to provide any collateral to get this loan. A fixed amount is disbursed, and the borrowers need to repay it in equated monthly instalments (EMIs). The rate of interest depends on the credit score, income profile, and the lender. For example, the IDFC First Bank’s FIRSTMoney offers a personal loan starting from 9.99 per cent.

Medical Loan: A medical loan is a variant of a personal loan, thus an unsecured loan, that can be used only for medical expenses. Few banks and non-banking financial companies (NBFCs) offer this loan, which can only be used to cover medical costs, such as hospital bills, surgery bills, consultation and prescription bills, and other such costs. The terms and conditions could be more flexible than a personal loan, such as a higher amount or a customised payment schedule.

Loan Against FD: Loan against FD is a secured loan, where the FD is kept as collateral, and that’s why the rate of interest is typically lower compared to the other two loans. However, the limit of the loan amount depends on the amount of FD. Banks usually offer loans between 80 and 90 per cent of the FD amount and charge 1-2 per cent interest over the FD interest. So, which option should a person use when the need arises?

Which Loan Is The Most Cost-Effective For Borrowers?

The collateral-based loans are always cheaper than those that don’t require collateral, but the processing time may be longer. A loan against FD is a collateral-based loan, but it requires very little paperwork, so overall it’s a cost-effective option for those who have FDs of sufficient amount.

Manish P. Hingar, chartered accountant, founder and chief executive officer, Fintoo, an investment planning platform, says, “For a medical emergency where cash is needed fast, a loan against your FD is usually the cheapest route. You typically pay only a little over what the FD earns, and processing is quick. Personal loans cost more.”

Joy PV, EVP and country head, retail liability and fee products, Federal Bank, says, “Loan against FD helps meet short-term liquidity needs while continuing to earn interest on the deposit. As premature closure may result in loss of expected returns, penalties, or non-payment of interest under certain deposit schemes, a loan against deposit can be a prudent and cost-effective alternative.”

So, a loan against FD is typically the most cost-effective option not just for a medical emergency but for any financial exigency.

However, Jose Peter, Co-Founder and CEO of Arogya Finance, a social healthcare-financing venture, highlights that borrowers can also check for some genuinely interest-free medical loans.

He says, “Borrowers should check for genuinely interest-free medical EMI options offered through healthcare providers. In these arrangements, the hospital or healthcare provider absorbs the interest, so the patient repays the principal in instalments, subject to the agreed terms. This can be more cost-effective than either an FD-backed or personal loan,” however, he quickly adds, “Not every medical loan is interest-free, though. Borrowers should compare any processing charges, the treatment price, total repayment amount, and whether the EMI is affordable after treatment.”

What Should A Borrower Consider While Taking A Loan For Medical Expenses?

When under financial pressure due to the high cost of treatment or a short-term recurring cost that isn’t covered under the insurance, the dilemma could be agonising, and in a hurry, one may exercise an option easily available, which could negatively affect one’s financial planning.  

Joy says, “For term loans against deposits, generally, there is no processing fee. These are suitable for meeting short-term financial requirements without disturbing long-term savings plans. So, these could be particularly beneficial where premature closure of a deposit could lead to significant financial loss.”

Simply, if one needs money urgently, a loan against an FD is a straightforward, hassle-free option to get funds, instead of breaking the FD, especially if the FD is going to mature in the near term. However, if the funds are required for the long term, this option may not be suitable.

“If you’ll need the money for longer, breaking the FD is often cheaper. Banks normally cut the rate by about 0.5 to 1 percentage point on premature withdrawal, and you pay that once. A loan’s extra interest keeps adding up every month until you repay. Another point to keep in mind is that FD interest is taxable, so the loan works out a bit dearer than it looks,” says Hingar.

So while taking a personal loan, a specific medical loan, or a simple loan against FD, one must check not just the rate of interest, but also the processing fee, tax cost, repayment flexibility, and charges on pre-closure.

Hingar says, “Whatever you pick, don’t judge it by the rate in the advert. Look at the annual percentage rate (APR), the processing fee, how long you will be repaying and the total interest you will have paid by the end.”

Peter says that published rates vary by lender. It could range from 7 per cent in some banks to over 30 per cent in others, depending on the type of loan and the particular case of a borrower.

He suggests, “A family should ask for the Reserve Bank of India-mandated Key Facts Statement from the lender to check APR and other applicable charges before accepting a loan, not after disbursement. Most importantly, one should plan a loan so that the instalments remain manageable even if the patient or a family caregiver temporarily loses income. The purpose of financing is to make treatment possible without creating a second financial problem.”

To summarise, when a medical financial need arises, one should check interest rates, associated costs (explicit and hidden), and flexibility of EMI payment from the lender. Don’t make a decision in haste. Ask for a key fact statement from the banks or NBFC to get a clear picture and then decide.