Debt is not always a bad thing. As long as it is managed well, debt can help you increase your income and quality of life. Here's how to turn debt into an asset.

What is an asset?

An asset is a resource that can generate future profits. Assets can be in the form of immovable goods whose value is difficult to change (fixed assets), such as houses, or goods whose value fluctuates and can be sold at any time, such as vehicles, labor, and investment portfolios.

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Debt can help you acquire the goods you want faster. For example, if you want to buy a car for Rp125,000,000 but only have Rp60,000,000 in cash, you can get the remaining Rp65,000,000 from debt, whether it's a bank loan or a credit card loan with a limit of 100 million, like an Honest credit card.

How to turn debt into an asset

1. Choose productive debt

Productive debt is debt or a loan used as business capital. For example, you take a loan of Rp65,000,000 to buy a car that will be used for online ride-hailing.

Currently, there are many debt programs for business capital that you can access at banks, such as business credit, people's business credit (KUR), working capital credit (KMK), and even TKI credit. You don't have to use specific business capital credit; you can also use other more flexible credit programs, such as unsecured credit (KTA), multi-purpose credit, or credit cards.

Each credit program has its own details. For example, if you choose to use a credit card loan, you must be prepared to pay an annual credit card fee in addition to interest charges. To choose the right credit program for your needs, do some window shopping at various credit providers.

2. Choose assets that generate greater returns than interest

To manage debt into assets, especially long-term assets, ensure you choose investment assets that generate returns greater than the interest and fees for taking out the credit. For example, if the interest on the Honest credit card loan you use to buy a car is 1.75% per month, then make sure you invest in assets that generate at least 3% profit.

It would be even better if you could choose assets that generate income greater than the bank installment and its interest. For example, if the car installment and car loan interest are Rp4,000,000, while your monthly income as an online ride-hailing driver is Rp5,000,000, then you can pay the installment and interest solely from your online ride-hailing income.

3. Reinvest profits

Want your debt to be paid off faster? Then, reinvest the profits you get from the interest difference into other assets. Then, the investment profits from these other assets are added to the credit installment. To make it easier to understand, consider the following illustration.

From the car credit above, you can get a profit of Rp1,000,000, which is obtained from your monthly income as an online ride-hailing driver and a portion of your income set aside to pay off installments and interest. To pay off your debt faster, you can buy bonds with that Rp1,000,000, which will yield a coupon of Rp50,000 per month. This Rp50,000 can then be used to supplement your car installment payments.

4. Help with cash

The 4th tip for managing debt into assets is to assist financing with cash. This means that not all business capital you use should come from debt. Allocate a portion of that business capital from cash. In the car credit example above, for instance, Rp60,000,000 from cash and Rp65,000,000 from debt.

This is important to lighten your credit installments and minimize the risk of default. Simply put, if something undesirable happens to the online ride-hailing business, you "only" need to pay a debt of Rp65,000,000 and its interest, which can be resolved by pawning or reselling the car.

5. Pay installments on time

One of the challenges of using debt as business capital is the potential for increased interest costs on unpaid installments. To overcome this, ensure you pay installments in full and on time so that the loan interest does not accumulate.

You can also choose a loan program that offers 0% interest, such as Honest. With an Honest credit card, you can pay bills with a credit card without having to pay interest and administration fees, as long as the installments are paid in full and on time.

Risks of turning debt into an asset

Using debt to buy an asset is a fairly risky action. Because if you fail to pay off the debt, the asset you bought or even your other assets could be threatened with liquidation by the bank. For example, you take a bank loan of Rp100,000,000 to buy a car and you fail to pay it off. Then, the car will be sold, and if its value is not enough to pay off the debt, then your other assets, whether it's a house or a motorcycle, could also be liquidated.

Therefore, make sure you choose the appropriate credit program and assets. Avoid buying assets whose potential profits and risks you do not know.