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The effects of the recent credit crunch have had a significant effect on the day to day finances of many individuals in the UK.

Many people who were previously unconcerned about their financial situation and were quite happily managing their personal loans, credit cards and mortgage or homeowner loan, along with all their other regular household bills, have suddenly found that due to circumstances beyond their control, possibly through a reduction in their regular household income due to job loss or a pay cut or due to a lack of available funding through a new debt consolidation loan, they are now struggling to keep up with their various loan repayments.

Although there are now the first signs starting to show through, that the UK economy may be on the mend, albeit slowly, for many people the damage has already been done and many borrowers are now facing problems with loan arrears and possibly worse.

Even for those people who have managed to keep their heads above water throughout the current economic crisis, the events of the past couple of years has brought home to them the fragility of their financial situation and many have realised that they cannot simply rely on their large monthly salary to always be there to cover their loan repayments and other monthly bills. This has provided a wake up call for many individuals who have taken the decision to review their finances on a regular basis and clear their outstanding personal loans and credit card debts, thereby freeing up extra monthly disposable income, which in turn may be used to build up some level of savings as an emergency fund, or financial safety net.

For anybody who is serious about actually clearing their outstanding personal loans and credit card balances, where to start can sometimes be a daunting prospect, depending on just how many different creditors there are to deal with.

As a starting point, it is always a good idea to put together an income versus expenditure plan. This should list all your income including salary, any secondary income and any benefits for which you may be eligible. If you have a joint household income, you should sit down together and carry out this exercise on a joint basis. Once your income is listed, then set about listing all your monthly expenditure. For utility bills which may be paid on a quarterly basis, work out the monthly equivalent and use this figure. It is vitally important to list all your outgoings, not just your loans and card payments, so include utility bills, food and travelling expenses along with the cost of regular leisure activities.

If done in enough detail, this should provide an accurate figure of just how much disposable income there is left at the end of each month, some of which may be redirected to repay loans and cards. This exercise is also useful as it may highlight certain areas where savings could be made instantly. Writing things down in an organised fashion will make the situation look a lot clearer than simply sitting looking at a large pile of paperwork from various organisations wanting money from you!

Once you have ascertained your disposable income, make a list of all your various credit agreements, including your mortgage, secured loans, unsecured loans, credit cards, store cards and overdrafts. For each of these write down the outstanding balance, remaining term (if applicable), monthly repayment amount and the interest rate being charged. Once again things will seem a whole lot clearer once they are written down.

Usually it makes sense to focus on those debts which are charging the highest rate of interest first, as this will save you the most money in the long term. This is most likely to be overdrafts and credit and store cards, although some credit cards offer zero per cent, particularly on balance transfers, for a limited period, so look carefully at these rates. Once credit cards have been cleared, usually the next most expensive form of credit is likely to be unsecured loans, then secured loans and finally, mortgage or homeowner loans.

Most of these types of loan will allow the borrower to make regular overpayments, but beware of early repayment penalties, particularly in the early years of a loan, as these could cancel out the benefits of overpaying. In this situation it could be more cost effective to make overpayments on a cheaper loan, rather than waste cash on repayment penalties. Any charges and penalties will be listed in the original loan agreement, which should state how much they are and how long into the term of the loan they will apply.

Although in the majority of cases, repaying the most expensive debts first is the best course of action, sometimes it could be beneficial to clear an outstanding small loan or card balance, even if this at a cheaper interest rate than some other commitments. If a loan or credit card has a reasonably small balance outstanding, it will be easier to clear fairly quickly. This will have the effect of removing one of your monthly commitments from the equation altogether and will also free up some more disposable income to redirect to other areas. This could be a particularly useful exercise for somebody who may be close to their financial limit on their income/expenditure budget, who needs to reduce monthly outgoings as quickly as possible.

Another popular option for someone with a number of credit agreements is to apply for a debt consolidation loan. This has the benefit of rolling up all a person’s various debts into one regular monthly payment, usually at a lower interest rate than they were previously paying and very often at a much lower monthly repayment amount.

There can be drawbacks with this route however. Firstly ensure that the interest rate on the debt consolidation loan is lower than those being charged on your existing debts, otherwise there is not a lot of point in taking this course of action. Secondly, if the term of the new loan extends beyond the repayment dates of the original debts, interest will be charged for longer and the loan could cost you more over the term, even if the monthly repayments are significantly less than your combined previous debts. Thirdly, it is important to repay outstanding debts with the new loan and then do not re-use your credit cards. Many people fall into this trap and end up with double the amount of debt than they started with. With a debt consolidation loan, you have not cleared your debts, you have only moved them all to another place!

If you are having difficulty in organising your debt repayment plan yourself, there are plenty of places which can offer assistance. There are various charitable organisations such as the Citizen’s Advice Bureau (CAB) who offer free debt advice. Independent Financial Advisers can also provide assistance, although they are more likely to charge a fee for their professional services. Even the local branch of your bank can help, although advice is often limited to their own products and services.

Finally, the most important thing to do once you have made a debt repayment plan , is to write it down, refer to it on a regular basis…..and STICK TO IT! Clearing debts can take a long time and a lot of perseverance and it will not happen overnight, but by remaining focused on your goals, you will end up debt free sooner than you may think. Good luck!