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Loans can help or trap: many people mismanage them

Loans can be a solution, but they can also turn into a financial disaster. Many people take out loans without fully understanding the interest rates,

sofyanto

January 14, 2026

Why Does Modern Society Need Loans?

Financial needs are inherently relative and dynamic. Everyone enters a phase of life where various needs need to be financed, whether those needs are primary, such as food and drink, housing, or business development.

Here are some personal survey results from several reasons why loans have become an essential part of modern financial life:

Rising Cost of Living

In my personal analysis and experience, annual price increases for goods have become a common occurrence. This usually occurs when government policies increase fuel prices or during the approach of religious holidays.

Many economic sectors are affected by these increases, such as basic necessities, education, healthcare, and even residential property.

Meanwhile, income does not always increase in line with rising prices for various necessities. At this point, a loan becomes a solution to cover the shortfall, especially in urgent situations such as:

Sudden vehicle repairs
Hospitalization of a family member
Children's school fees
Home renovations after a disaster

We cannot deny that situations like this often occur, so seeking a loan becomes a reasonable solution.

Opportunity doesn't always knock twice.

The reason for seeking a loan is because there is a business opportunity. Whether it's receiving a promotional flyer from a company offering a significant property discount, or the availability of a certain type of housing unit, these opportunities need to be seized, as they often only arise once.

If you wait until the funds have been accumulated, the opportunity may be lost. In situations like this, a loan becomes a tool to accelerate the achievement of goals.

A personal experience: I received an offer for land that I considered quite reasonable in price. Furthermore, after visiting the location, I found it was right on a main road. At the time, my financial situation was not good, and I ended up taking out a loan from the bank to purchase the land.

Long story short, I was able to buy the land with the loan, and if I had been even slightly late in purchasing it, I might not have owned it. Two years later, I sold the land again, with a 30% increase in price from the original purchase price.

From this case study, it can be seen that loans become a tool to achieve goals by maximizing existing momentum

Business capital doesn't always come from savings.

Many businesses thrive not because the owners have substantial savings, but because they have the courage to take out measured loans.

Several friends who own medium-sized businesses shared stories about how they built their businesses from scratch to become large. In the initial stages, they relied solely on personal capital, and as their businesses grew, they began to increase their capital through bank loans.

In general, the need for credit facilities in small businesses or MSMEs is usually for:

increasing stock availability
purchasing new equipment
opening new branches
increasing production capacity

Housing is a long-term need

Property is one of our human needs and requires significant investment funds. For people living in urban areas, housing loans are a solution for them to obtain a livable home.

Without a home loan, the dream of owning a home might be just a fantasy, as the sea breeze gently blows while sitting on the beach. Most people need decades to save up to build or buy a home.

A mortgage is not just a facility, but a golden bridge to long-term financial stability.

Loans can improve your credit score.

When we manage our loans well and without any flaws, our credit history becomes positive. Several years ago, I took out a multi-purpose loan from a government bank with a 10-year term.

During that term, my installments were always on time. In the ninth year, the bank offered me a new loan limit twice the initial amount.

Loans as a financial optimization tool

A loan is a debt that we will repay because it is not a gift. If we use this debt according to the original plan, it can become a tool to:

improve our quality of life
improve our cash flow
develop our assets
maximize income opportunities

In short, loans are a strategy to address various problems that must be managed properly. I've also discussed this in the article saving for future goals.

Personal Loans

This is the most flexible personal loan compared to business loans. This loan is suitable for general needs, both consumptive and productive.

Because of its flexibility, personal loans are popular and dominate the banking queue. There are two broad categories of these loans:

Unsecured loans
Secured (Collateral)

Personal loans are typically used for:

Business capital
Home renovations
Education costs
Medical expenses
Travel
Urgent needs
Purchasing specific items

Therefore, there are no restrictions on their use, allowing borrowers to use them as they wish.

Types of Personal Loans

a. Unsecured Loans

This is the most popular type of loan. Imagine not having to provide collateral and being able to get money so easily and quickly. However, make no mistake, lenders usually charge higher interest rates. Furthermore, the loan limit is limited.

Their reason is that they will bear a greater risk in the form of bad debts. This is certainly not a good assessment from Bank Indonesia or the Financial Services Authority.

b. Secured Personal Loans

In contrast to versions with collateral such as house certificates, vehicles, or deposits, because the risk is lower, the interest charged by lenders is usually lower.

The loan limit tends to be larger, depending on the value of the collateral used. However, the risk is that if the loan defaults, the collateral will be lost.

c. Sharia Loans

This type of loan contract does not use interest, but rather uses murabahah, ijarah, or qardh. In Islamic teachings, interest on loans, according to some scholars, falls into the category of usury (riba), which is forbidden. I personally use this type of Sharia loan to maximize the blessings of using the money.

Important Things Before Taking Out a Personal Loan

A joke among some close friends is that borrowing is easy, but repaying it is difficult. There's even an old adage that says when you borrow, you'll be chased, but when you ask for your money back, you'll be like a beggar.

To avoid falling into the same trap as those two proverbs, pay close attention to the following:

Calculate your monthly repayment capacity
Choose an appropriate term
Pay attention to the total cost
Read the agreement carefully and thoroughly
Ensure the financial institution is legal and trustworthy

Often Overlooked Personal Loan Risks

Risks are like two sides of a coin; there are good and bad sides that go hand in hand. Even when it comes to borrowing from a financial institution, when the loan management method deviates from the initial plan, risks automatically arise simultaneously. This situation can occur because:

The installments exceed 30% of your regular income
Using funds for consumer spending
Frequent late payments, which impact your credit score
Additional costs that are not overlooked

To reduce these risks, I recommend using personal loans only when you really need them and only for emergencies.

Business Loans

These loans are not the same as personal loans, and I could even say they are quite different. This banking product is specifically designed to support operational needs or business development.

For home industry entrepreneurs, this type of credit is almost the same across all state-owned banks: people's business credit. If you've only been running a business for about six months, this credit can be an alternative way to increase your business capital.

Why do MSMEs need credit?

Many MSMEs, including myself, start with limited capital. To grow rapidly, they do need additional capital, which I use for:

purchasing additional machinery or equipment
increasing production capacity
improving infrastructure
developing services

Without additional capital, my business growth slows. However, it's important to remember that additional business capital is needed if there's market potential. In other words, prioritize marketing first, and then, once the market is well established, gradually increase the capital.

Types of Business Loans

People's Business Credit

This credit is a monetary policy of the Indonesian government intended to stimulate the people's economy.

Don't be surprised, this credit is valid and available at all state-owned banks. The main characteristic of this loan is its low interest rate compared to general loans. It's only for MSMEs.

Data from recent years shows that the number of customers for micro-enterprise loans has consistently increased significantly. This is evident from the loan value that banks have successfully disbursed, which by 2025 had reached 83% of the national target.

Working Capital Loans

From the name alone, we can tell the purpose of this loan: we use it for daily operational needs such as purchasing raw materials, paying suppliers, or paying employee salaries.

Investment Loans

Used to purchase long-term assets such as machinery, vehicles, or business premises. However, what we buy can have asset value if it generates income. For example, if a car is used as a passenger taxi, it can be considered an asset.

However, if it's only for personal use, it doesn't have asset value. For a more complete and detailed explanation, see another article on how to make money , without capitalhave this asset.

Invoice Financing

Loans based on customer invoices. Suitable for businesses with accounts receivable but need quick capital.

Unsecured Business Loans

Based on personal experience, this category is usually provided in smaller amounts, but the process is fast. Micro-enterprise loans fall into this type of loan category. Initial capital includes a business certificate from the village government, a business permit, and a taxpayer identification number. Next, a bank loan officer will conduct a field survey of your business. If they deem it suitable, the loan can proceed to the next stage.

Risks in Taking Out a Business Loan

Every business carries risks, especially if it's still a startup or in the development stage. These risks will ultimately impact the loan amount. As a business owner, you need to understand that

business income is unstable
calculations should not be overly optimistic and overconfident
capital utilization sometimes does not go according to plan

These three factors form the foundation before deciding whether to use additional capital from a loan or simply use personal capital.

Home Ownership Loans

Who doesn't need a home? Perhaps only Tarzan doesn't need protection from the heat and rain. We all agree that a home is an essential need, but not everyone can afford it in cash. Home ownership loans offer the solution.

What is a Home Ownership Loan?

This is a long-term financing facility for someone who plans to buy a house, shophouse, or apartment. The term can be up to 15–20 years.

Types of Home Ownership Loans

Conventional: Uses a fixed or floating interest rate.
Sharia: Uses a profit-sharing or sale-and-purchase system.
Subsidies: Aimed at low-income communities with lower installments.
Refinancing: Transferring a home ownership loan to another bank for a lower interest rate.

How Home Ownership Loans Work

The bank will provide a loan, and then we are required to make monthly installments consisting of principal and interest. The longer the loan term, the smaller the monthly installments, but on the flip side, the total interest will be higher.

Why is this? From an economic standpoint, this is related to the intrinsic value of money, which requires a separate discussion in another article.

Important Things Before Taking Out a Home Ownership Loan

Similar to the loans I discussed previously, we need to ensure the following:

Ensure a clean credit history and not be blacklisted
Prepare a down payment
Calculate your monthly repayment capacity
Check the legality of the property you intend to pay for
Understand the interest system that will be charged

Understanding the Interest System in Loans

Many borrowers are unaware that there are several types of interest that banks apply to loans. This can affect our total monthly installments.

Flat Interest

This type of interest rate is always the same each month. Even if the government implements monetary policy to lower bank interest rates, this does not apply to customers whose credit agreements use flat interest. Even if the principal is almost depleted, our installment amount to the bank will always remain the same.

Effective Interest

This interest calculation is based on the remaining principal. This means that once you have paid the loan installment this month, the bank will recalculate the interest based on the remaining principal in the following month. So, the installment will automatically decrease each month.

Annuity

This last type of interest rate is always the same monthly, but the proportion allocated to the principal and interest will vary. To make it easier to understand, let's take an example of our loan:

Loan : IDR 100 million

Term : 12 months

Annuity interest : 12% per year

Monthly installment : ± IDR 8.88 million (fixed)

Month 1: Interest: IDR 1 million

Principal: IDR 7.88 million

Month 6: Lower interest (<1 million)

Principal: Larger

Month 2: Very low interest (<1 million)

Principal: Almost the entire installment

How to Manage Loans Wisely

A loan is a debt, as I mentioned before, and we must repay it. To avoid burdens later, we must manage it with discipline.

Use it for clear needs.

This means you must have a goal first, what you will use the loan for. It can be effective if we direct its use to:

important and urgent needs
profitable businesses
improvement of assets with economic value
education costs

Create a payment plan

According to some financial experts, such as Dave Ramsey from the United States, total monthly debt obligations should not burden primary cash flow. More clearly, the Indonesian Financial Services Authority policy states that the debt service ratio is between 30–35% for low-risk customers.

So, if our total monthly income is only 5 million rupiah, then 30% of that amount, or 1.5 million rupiah, can be used to pay off loan installments. Anything more than that will definitely be a problem.

Avoid having multiple loans at once

Avoid having multiple loan options because the financial burden will increase, potentially creating a bad credit history. If you must borrow, I highly recommend sticking to just one financial institution.

Choosing the Right Loan for Your Needs

Not all loans are suitable for everyone, as it depends on each person's interests and needs. Here's a brief guide:

1. If you need quick funds without collateral, choose an unsecured loan.

Suitable for urgent and short-term needs.

2. If you want to start a business, choose a Business Loan.

It is recommended that the capital be used for productive activities.

3. If you want to buy a house, choose a home loan.

Choose a term that suits your long-term repayment capacity.

Conclusion

Personal loans, business loans, and home loans all serve an important purpose if used wisely and appropriately. The key isn't the product itself, but how you manage it, such as:

understanding interest rates
calculating repayment capacity
choosing the right product
maintaining payment discipline
using funds according to your goals

Wise financial decisions will help us achieve long-term financial stability, expand opportunities, and realize big plans more measurably.