Consumptive Debt and Productive Debt, Important to Distinguish These Two Things

Talking about debt, surely you think about the debt that must be paid, sometimes even with various interest rates that are burdensome to the guarantor. However, this does not always refer to a negative financial burden. Maybe, you feel confused about the previous exposure. However, in the financial world, there are terms known as consumer and productive loans.

Understanding Consumptive and Productive Debt

As each person's needs and desires increase, realize that everything does not have to be fulfilled, but can be postponed or replaced with other things that are more economical. However, most people do not understand this well. Therefore, many people are shackled by various loans and have difficulty repaying or paying.

Consumptive Debt and Productive Debt, It is Important to Distinguish These Two Things

1. Understanding Consumptive and Productive Loans

So, if you find a loan with a value that continues to decrease, whether for consumption needs or other things and has no potential to increase the income of the guarantor, then you are studying the definition of a consumer loan. An example is purchasing branded bags via installments. Well, this installment does not provide any benefits, except that you have to pay regularly.

Then, in contrast to consumer loans, productive loans are defined as loans that can increase the income of the guarantor or tend to be productive. For example, a loan is used to buy a printing machine so that the printing business can grow. So, this installment has value to provide benefits in the future.

In general, what differentiates the two is the utilization of the needs obtained from the loan. If consumer loans do not provide positive value, then on the contrary, productive loans have surplus value for life. Thus, paying off debt can be an enjoyable activity, because you understand that there are various positive things behind the loan.

2. Turning consumer loans into productive ones

If productive loans have various positive values, then can consumer loans be converted into productive loans? In general, this can be done. The reason is, not always the loan that is covered always has a negative value. The key is managing loans or using assets to increase the productivity of the underwriter.

Meanwhile, poor loan management or asset use can also turn productive loans into consumptive loans. The reason is, that these mistakes cause various financial problems, both now and even in the future. In this way, positive things can turn into things of negative value.

A simple example of a consumer loan that becomes a productive loan is the purchase of a motorbike, which was initially purchased for fun. However, motorbikes are used for work so they can increase income or reduce transportation costs. So, the cost of purchasing a motorbike, which was originally a consumer loan, automatically becomes a productive loan.

3. Loans Still Require Planning

So, if you borrow something, it means you must return or pay the loan. In essence, current debt is needed, whether just to meet the need to use productive or consumptive loans. For example, by applying for a loan from a bank with affordable interest for various parties.

This means that when deciding to apply for a loan, the guarantor must have a certain plan regarding repayment. This can be done by comparing income with the period and the amount of installments that must be paid. In this way, insurers can minimize risks and optimize profits.

This is a review of consumer and productive loans which are often used by various parties. It's best to decide to use a loan that has productive value, whether for business, renovation or for urgent health needs. By borrowing wisely, you have entered a quality life, such as applying for a loan through a bank.