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It’s not always possible to reply to readers’ questions individually, I apologize to them whom I could not respond to. This post revolves around a reader question – Pravin asked, whether he should go for a personal loan or home equity loan, to fund medical expenses for his visiting mother. His mother is not adequately insured through traveler’s insurance she got from her home country.
For immigrants, it’s common practice, parents come from their country on a temporary health insurance. Often these insurance have fine prints and exclusion clauses that no one cares to read. Pravin is unfortunate to face this situation, as 99% of the time, medical attention is not required during parents’ stay in United States, which only lasts a couple of months or so due to visa restrictions. (SEE ALSO – Best personal loan option)
Pravin didn’t mention how much he needed, I assume whatever is required can be obtained from loans, he’s a home owner and still paying the mortgage in all possibility. This loan is going to be added burden on his finances. I am not saying he shouldn’t bear the cost, he should, in-fact it’s against our culture. Parents pay for college, marriage, etc. and, sons/daughters look after their parents once they retire.
There are various options available to meet with emergency expenses, personal loans, cash loans, secured loans, unsecured loans, payday loans and so on. Two of the most common types of loans are personal loans and home equity loans. Let’s first understand what are they.
There are different types of personal loans
The term “personal loan” is a generic term used for a wide range of loan products that fall into three main categories: secured loans, unsecured loans, and personal lines of credit.
A secured loan, like a mortgage, is one in which the debt is secured by collateral, such as a house. An unsecured loan is borrowing money from credit card accounts where collateral is not needed. A personal line of credit allows you to borrow as much or as little as you need against a preset credit limit.
Home equity loan
As per Wikipedia – A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. Home equity loans are often used to finance major expenses such as home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house, and reduces actual home equity.
When to go for personal loan?
A personal loan is better suited for smaller purchases, such as small medical expense, car repair or a used car that you can pay off quickly. The application process is simpler than with a home equity loan, but personal loans have higher interest rate as compared to home equity loan. Because, personal loans are unsecured loans.
When to go for home equity loan?
A home equity loan is preferred when you’re faced with a large expense, such as college tuition or major home renovations, and need significant time to pay. The interest rate will be lower than a personal loan, but borrow wisely: The rapidly changing real estate market can affect the amount of equity in your home.
What should Pravin do now?
The average rate on a personal loan, being unsecured one, is higher than home equity loan. So, home equity should be his natural choice. Though he didn’t mention about his third option, perhaps because he didn’t know, which is borrowing from his retirement saving account (yes, I see you rolled your eyes).
In ascending order of interest rate the three options look like: 401 (k) loan, home equity and personal loan. So, mathematically 401(k) loan is best option.
Psychologically, I prefer not to touch 401(k) (or IRA), if you do, you run risk of ruining your retirement life. God forbid, if medical cost increases, he has to loan again. In extreme case, if Pravin has to declare bankruptcy, his retirement fund would be untouched. So why he should borrow from retirement fund?
Now left are two options, home equity loan and personal unsecured loan. Unsecured loan, though having higher rate, secures Pravin’s home, if he can’t pay the loan back. So, I prefer him taking out personal unsecured loan. The point to keep in mind is, Pravin should apply for this loan in bank/credit union where he banks already. I wouldn’t suggest him going for the instant money-lenders or pay-day lenders.
Had the expenses been planed, like home repair, major purchases, etc. home equity loan would have made much more sense. But, in this case we do not know how much money he’ll end up needing at the end.
I will also suggest him to get the medical treatment done in their home country where the cost is just one tenth of the cost in United States, if possible to move her out of country. If that is possible, I would have taken loan from my 401(k) because all I need here is a measurable and limited expense to make her fit for the overseas travel.
This is unfortunate scenario for Pravin, wish her mother a speedy recovery. How do you feel about my decision readers? Do you have better advice?
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That sucks, but I agree with the personal loan. If it hits the fan, walking away from the personal loan will hit you in the credit score, but you won’t loose your house. The only time I’ll ever borrow against the value of a house is to buy the house in the first place.
I would have to agree. Putting your house up as collateral is really risky. If ER strikes, you don’t want to be homeless too. Take the personal loan if you have too but check out to see what other sources of aid there are out there. There may be other options apart from a loan. See if there is a local government aid office that can assist with medical expenses.
I am a nurse at a county hospital (which means it is largely used by people of limited money), and I see this situation VERY often. I feel so badly about the stresses this puts on the family, which are very visible. The visiting parent or relative, too, is stressed about how much this will cost the family, and that affects healing. It must be so hard to want “everything” done for the patient but have to weigh each test and procedure against the cost. (Sometimes the tests are more “good to have” than “necessary” but it is impossible to sort those out–sometimes difficult even for the health care provider.)
My one suggestion is that Pravin needs to talk to the financial people at the hospital. It is quite common that something can be “worked out” as far as payment plans go. The payments can be spread out over time, lessening the need for a loan, at little or no interest; and it is sometimes possible to have part of the bill forgiven. Immigrants (or anyone, really) may be unaware of these options, and may feel like they should not ask. THERE IS NO SHAME IN ASKING! It is not like taking welfare or handouts. Even if the hospital is not able to do anything for Pravin, she will not lose anything by asking.
Excellent suggestion from you and Miss T, I have provided this URL to Pravin, hopefully he’ll get time to read comments and take necessary actions
I prefer home equity lines of credit over home equity loans. Having a line of credit available to tap into the equity of your home is a great thing right now. The rate will be dirt cheap, the interest will be tax deductible, and it’s more flexible than the other options. You can have it available and never use it. Even though the rate is variable, most have a lock-in option if rates start to rise.
Still the amount is finite, we are talking about an expenditure that may cross home equity amount. Pravin should be prepared for any eventuality. I see home equity as risky in his case.