Episode 4: Is debt ever a good idea?

In Nigeria, there seem to be two extremes when it comes to people’s general attitude to debt. On one extreme, there are people who are afraid to entertain the notion of any debt at all because they see it as dangerous and would rather pay cash for everything.  On the other extreme there are those that are so comfortable with debt that they don’t pay back and become known as what Yorubas call ‘onigbeses’

However, debt can be a useful tool to attain financial success but how you use it matters.  There is good debt and bad debt. Wealthy people use debt as a tool to leverage their investments and grow their cash flow, but poor people use debt to buy things that make rich people richer. Only borrow to acquire an asset that will appreciate in value.

People with bad debt habits will typically go into debt buying things their income cannot support. They will borrow money to purchase big-ticket items that don’t appreciate in value and most likely can’t cover the cost of the debt over time.

Debt is typically considered good when you use it to acquire an asset that has the potential to appreciate in value and bad debt is when you do the opposite and take a loan or rely on credit cards to purchase things that depreciate in value i.e cars and consumer goods.

However, whether debt is good or bad there are some grey areas.

3 Commonly asked questions about debt

Should I take a loan to pay for my education?
Getting a good education is generally considered a positive thing because in principle it increases your chances of employment and the potential to earn more but we like degrees in Nigeria sha. In fact, we can be quite extreme, the more degrees the better is our motto when it comes to education. Its completely normal for someone to have 2 MScs in what I would consider meaningless degrees and still be trying to acquire a PHD. However, the reality is that multiple degrees do not guarantee employment let alone high paying jobs. These days it’s about how well you are able to apply knowledge in the real world. So in my opinion, if you take a loan to further your education it should be a degree in something that puts you in the best position to increase your earning potential enough to be able to pay back said loan. Otherwise, the consequences can put you in a situation where you are living from hand to mouth trying to repay said debt.

Should I take a loan to invest in real estate?
Real estate is a fantastic investment in the medium to long term and its generally advisable to take debt to acquire real estate assets. However, this can turn from good to bad debt if you haven’t considered your options and circumstances carefully. For example, if you take on a loan to buy a rental property, it’s a good loan if the rental income from the property can cover the cost of the loan (interest etc.) and in the best-case scenario even have some change left over. However, if you take a loan to buy land with the hopes of capital appreciation because of the high interest rates Nigeria is notorious for this might quickly turn into a bad loan if anything changes in your income and you can’t service the loan or capital appreciation does not happen fast enough because in the land scenario, the asset isn’t generating any immediate income so it might be advisable to either pay cash or save towards a real estate investment like that.

Should I take a loan for my business?
Access to capital is often cited as one of the major obstacles entrepreneurs in Nigeria face and to a large extent I agree. However, I find that raising debt or equity for your small business can be detrimental if your business model is faulty. The extra money will only help to amplify the problem as opposed to solving it. A N100, 000 problem can easily turn to a N1, 000,000 problem.  I often hear entrepreneurs complaining about making a loss and say things like if I just had ten million I would be able to grow my business but when asked further questions about how exactly that money would impact their bottom line they struggle to give a straight answer. Taking on debt for your business is usually only a good idea when you know said business can generate enough positive cash flow to pay at least the interest on the loan.