Debt consolidation is becoming an increasingly popular way for people to deal with escalating debts. In a debt-ridden society, being in debt is no longer viewed as an unsolvable problem or as such a barrier to future financing as it used to be.

Many people looking at debt consolidation as an option are already in financial distress and, therefore, in a hurry to enter into one of these complex agreements. This inevitably means that other options, which may be more appropriate in the circumstances, are overlooked.

Here are some of the questions that a borrower should ask before entering into any debt consolidation loan:

• what interest rates are chargeable and whether the interest rate is variable;
• what the overall cost of the loan will be;
• what the monthly payments will be throughout the loan;
• whether there are any aspects of the loan that may mean that the payment values alter (either up or down);
• what happens if the loan is settled early or if any payments are missed

Once you have entered into a debt consolidation agreement it is important to make sure that these payments are always met in order to ensure that you do not suffer any large penalties. It is also vital that you do not further add to your debts. Remember, the purpose of debt consolidation is to reduce the number of debts that you have, so do not slip backwards, which would mean that the benefits of the consolidation would largely be lost.

Anyone considering debt consolidation would be wise to look at the alternatives available to them before entering into any consolidation agreements. Once multiple debts have been consolidated, it is not possible to reverse the process and deal with the individual debts again. Bear this in mind, as some of the individual debts may have been at a favourable rate or offered the option of early repayment. These advantages would simply be lost following debt consolidation.

It may be possible to enter into negotiations with those to whom you owe money in order to create a payment plan that is sustainable for you and not overly onerous in terms of repayment. Start by working out exactly how much you can afford to pay towards ALL of your debts on a monthly basis. Be realistic when calculating this figure and make sure that you allow enough spare cash so that you do not find yourself in a position where you cannot make the payments that you agreed with your creditors.

Having worked out the total that you can allocate to clearing your debts, sit down and work out the following information for each of the debts:

• the amount of the debt in total;
• the amount that you are currently paying, monthly;
• the interest rate that you are paying;
• how long there is remaining on the debt; and
• any clauses or restrictions such as early repayment charges or default charges.

From this basic information you can work out which debts should be cleared first (i.e. the ones costing you the most money in the long-term) and the ones which should not be prioritised as the rates are lower or there are early repayment charges that would discourage any additional payments.

Write a letter to each of your creditors stating your income and expenses; indicate how much you can realistically pay off against each debt, on a monthly basis. Remember, a creditor is better off receiving small payments from you, on a regular basis, than a total default on your part. However, a creditor is under no obligation to accept this lower amount, but it is often a good way of opening negotiations.

If you are in a position whereby you have insufficient funds to deal with even minimal payments, contact a debt counselling agency (there are numerous free options available) which can advise upon the best options for you. If you have a mortgage, it may be worth requesting that you pay interest only, for a short period. This will enable you to redirect the capital repayment part to clearing other, more expensive debts such as credit cards or personal loans.