Professional Debt Mediation vs. Debt Consolidation

Have you ever pondered the difference between professional debt mediation and debt consolidation? Professional debt mediation is when a negotiation professional negotiates with your creditors for reduced interest rates, cut repayments, extended repayment periods, and postponed due dates on your behalf. In contrast, debt consolidation has no negotiation – it’s a personal loan you take out to pay off all your debts at once, ensuring you have just one repayment each month.

In this post, we’ll discuss the difference between debt mediation and debt consolidation: what they are, their applications, their key differences, how to decide between them, and how Credit Rehab can help!

What’s Debt Mediation?

Voluntary debt mediation is the process of enlisting a debt management professional to negotiate with your creditors for reduced interest rates, cut repayments, extended repayment periods, and postponed due dates on your behalf. This could make repayments easier and help you avoid legal action, as you’ll have less chance of defaulting (not paying your creditors back).

If you default, you’ll still be subject to legal action, as debt mediation doesn’t offer legal protection.

Example

Joshua owes his creditors R50,000 across all of his accounts. Using a professional debt mediator, he managed to lower his total repayments to R25,000 and his interest rates by an average of 5%. He saves money and avoids legal action because of defaulting. Joshua also has more room in his budget.

What’s Debt Consolidation?

Debt consolidation is when you take out one big loan to pay off all of your other loans to obtain lower interest rates. It’s marketed as a loan that’s cheaper than the costs of your other credit agreements because of its lower interest rates. In truth, interest rates depend on the strength of your credit profile – late payments, defaults, and high credit utilisation rates can cause higher than usual interest rates (as a sort of insurance policy for the creditor), which can make consolidation loans more expensive than your initial agreements in the long run.

Example

Mary owes R350,000 in credit card debt, an auto loan, and personal loans. She takes out a consolidation loan and repays all her debt at once. This leaves her with one monthly admin fee and one monthly repayment. Since Mary has a strong credit profile, she obtains a lower interest rate of 18% on her loan.

If Mary had a poor credit profile, she could have faced interest rates as high as 27% – almost a third of her loan in interest every month.

What Are the Differences Between Debt Consolidation and Debt Mediation?

Debt consolidation and debt mediation are two vastly different means of addressing debt. Debt consolidation is a loan to pay off your debt, whereas debt mediation is negotiating with your creditors for lower payments and extended repayment periods.

When to Choose Debt Consolidation

You should choose debt consolidation if you have a strong credit profile and want one repayment each month with one admin fee. If you don’t have a strong credit profile, opt for debt mediation.

When to Choose Debt Mediation

Choose debt mediation when you have a poor credit record, are struggling to make repayments, or when a debt consolidation loan would be an unwise financial choice. This way, you could obtain lower interest rates, reduced repayments, extended repayment periods, and postponed due dates.

Need a Debt Mediator?

Credit Rehab’s team of financial experts can help you obtain lower interest rates, reduced repayments, extended repayment periods, and postponed due dates with professional debt mediation. We have years of experience helping South Africans of all financial backgrounds become debt-free. To learn more, contact us today.