The D-word, DEBT, has many people lying wide awake and counting the lines on their ceilings. A debt, which is money you borrow and promise to repay at an agreed-upon time with an interest rate, can often come with financial stress if not managed properly. 

Unfortunately, due to the country's inflation rate, the CBN reports that the debt rate of Nigerians has skyrocketed from N2.41 trillion to N3.32 trillion as of October 2024. The good news, however, is that debt doesn't always have to be a bad thing. 

There's good debt and bad debt, with the former used to increase your future income and the latter, such as payday loans, taken with high interest rates for luxurious living. 

In this article, we'll explore the two types of debt and illustrate the differences between them.

Key Takeaways

• A good debt has the potential to improve your life and increase your net worth.

• A bad debt does not contribute to increasing your net worth and can negatively impact your credit score.

• Examples of good debt include student or education loans, mortgages, and business loans.

• Examples of bad loans include payday loans from loan apps and loans to fund extravagant lifestyles.

What is a Good Debt?

A good debt helps you improve your future, builds important things in your life, and grows your wealth. It's usually tied to something that increases in value over time such as your business, education, or property. 

Contrary to quick, high-interest loans that offer no lasting benefits, good debt can pay itself off in the long run. A typical example of good debt is taking out a Moniepoint business loan to finance your catering business. 

If you're already generating steady sales, taking out a business loan to purchase additional cooking equipment to cater to more orders and increase revenue can be considered a good debt.

Examples of Good Debt

1. Educational Loans

Education opens up opportunities for employment and earning potential. Better-educated workers are more likely to secure high-income jobs, ultimately providing them with the means to repay their student or educational loans. 

For example, Amaka takes a N200,000 loan to pay her tuition for a tech boot camp in Lagos that trains her in software development. Within the following year, she will be able to land a job as a junior software developer and pay off the debt. This kind of debt is a good debt as it increased her net worth.

2. Business Expansion

Borrowing money to expand or start up your business is considered a good debt. This is because if the business scales up and generates more revenue, you will be able to pay it back and improve your life in the long run.

For instance, Chidinma has a bakery and makes around N500,000 monthly. She takes a loan of N3 million and buys a new oven, batter mixer, and some ingredients. Thanks to her expansion, her monthly income triples, and she's able to repay the loan within two months. Chidinma has a good debt while improving her life in the long run.

3. Loan to invest in Real Estate

You can invest in real estate by buying land in developing areas, purchasing a house to live in and then reselling it for a profit, among other options. 

For example, Tolu is tired of paying rent in Abuja, so she applies for a ₦7 million mortgage to purchase a 2-bedroom apartment in a rapidly developing area, like Lokogoma. Instead of paying ₦800,000 annually to a landlord, she now channels that money into monthly mortgage payments. 

After living there for seven years, the property value climbs to ₦40 million. While Tolu lived in the house, she was building equity, which is the value she owns in the property after paying off part of the loan. 

When she decides to sell, she not only recovers her investment but also makes a profit. Additionally, owning the home provides her with access to benefits that renters typically don't receive, such as potential tax relief (for self-employed individuals) and long-term security.

What is Bad Debt?

A loan that doesn't help you improve your long-term financial stability or build your wealth is considered bad debt. It often comes with short repayment periods, high interest rates, and is typically spent on things that lose value quickly, such as clothes, gadgets, or events. 

Unlike good debt, there's little or no return on investment (ROI), and it can easily trap you in a cycle of owing more than you earn.

Today in Nigeria, numerous 'buy-now-pay-later' schemes are growing rapidly, making it easier than ever to borrow money for short-term needs. However, if you're not careful, bad debt can damage your credit score, reduce your income, and leave you struggling to recover.

Examples of Bad Debt

1. Borrowing to Buy a New Phone or Gadget

Phones and electronics lose their value quickly, and borrowing money with high interest rates to buy the latest models is a bad debt. 

For instance,  Seyi borrows ₦400,000 from a loan app to buy the latest iPhone, planning to repay in four months. With a high annual percentage rate (APR), he ends up owing nearly ₦500,000. A few months later, the phone's value drops, and he's still stuck with the loan and late payment penalties.

2. Using Payday Loans to Cover Daily Expenses

Payday loans are small, short-term loans used to "hold body" until salary comes in, but they come with high interest and can create a dangerous cycle.

For example, Kunle borrows ₦30,000 from a loan app to buy groceries and pay bills. The loan is due in 14 days with a flat fee of ₦7,000. He repays using most of his salary and ends up borrowing again the following month. 

Over time, this type of debt becomes a routine, and Emeka is stuck in a loop of high-interest loans with no savings or progress.

3. Taking a Loan for a Party 

While It may feel good at the moment, borrowing money to look good or throw big birthdays, weddings, or naming ceremonies isn't worth it. 

For instance, Bukky takes a ₦500,000 loan to plan a lavish birthday party for her daughter. After the event, she struggles to repay the loan, especially since her monthly income is barely enough to cover essentials. The photos are lovely, but the monthly payments drag on for months with no financial return.

Bad debt often feels urgent, but it rarely adds value. Knowing how to spot it and avoid it can save you from long-term financial stress.

Good Debt vs Bad Debt: The Main Difference 

The main difference between a good debt and a bad debt is that a good debt has the potential to improve your life and increase your net worth. On the contrary, a bad debt does not contribute to increasing your net worth and can negatively impact your credit score.

Understanding the difference between good and bad debt can help you make smarter loan decisions. 

Here's a breakdown of the difference between good and bad debt:

How to Decide If a Loan Is Worth Taking

Before you decide to take out that loan, be it from a fintech institution, bank, or cooperative, stop and ask yourself these few questions:

• Can I repay it without financial stress?

Your repayment shouldn't choke your monthly budget. If repaying it means cutting off food, transport, or rent, think again.

• Will this loan help me earn more in the future?

If you're investing in something that grows or appreciates, such as your business or skill set, it might be worth borrowing.

• How long will it take me to repay, and is the time frame realistic?

Don't agree to short repayment periods if your cash flow isn't consistent. You could end up borrowing again to meet the first loan, thereby starting a dangerous cycle.

• Is the interest rate reasonable?

Look at the annual percentage rate (APR), not just the "flat fee." A loan with a small weekly charge might cost more in the long run.

• What happens if I miss a payment?

Understand the consequences. Some lenders charge heavy penalties or report defaulters to credit bureaus, thereby damaging their credit scores.

How to Avoid Falling Into a Debt Trap

It's no secret that the country's current economic state is harsh due to inflation. Loan apps seem to be the 'saviours of the day' with just one tap into debt. But avoiding debt traps comes with determination and discipline; here are a few tips to avoid them;

1. Avoid loan stacking

That's when you take one loan to repay another. It might look like a solution, but it only delays the problem and increases your total debt.

2. Read the loan terms carefully

Before you click "Accept." Be aware of the repayment date, interest rate, hidden fees, and penalties for late payments.

3. Create a repayment plan before you borrow

Whether it's weekly or monthly, your repayment should fit comfortably into your budget. 

4. Borrow only what you truly need

Just because a lender offers ₦300,000 doesn't mean you should collect it. If ₦150,000 will do the job, stick with that.

5. Know your credit score

Some lenders in Nigeria now use credit reports to determine who qualifies for a loan and at what interest rate. A poor score can limit your options. (link to borrow smart article)

6. Have an emergency fund

Even saving ₦5,000 to ₦10,000 per month can help you avoid borrowing for small issues, such as repairs or airtime.

Staying financially healthy is not about how much you earn but rather how well you manage what you borrow.

How Moniepoint Supports Responsible Borrowing

When it comes to borrowing, Moniepoint believes in growth over pressure. Whether you're running a small business or dealing with an urgent need, Moniepoint offers loans that are fast, transparent, and tailored to your income.

Here's how Moniepoint makes borrowing smarter:

• Business-first focus: Loans are designed to help entrepreneurs grow their ventures, not to fund wasteful spending.

• Fair interest rates: You know the cost upfront, as there are no hidden charges or funny surprises.

• Flexible repayment: Choose terms that match your cash flow, not terms that put you under pressure.

• Little or No Collateral: Easy access to funds without tying down your assets.

Whether you're expanding your business or restocking your shop, you can borrow with purpose and confidence.

Final Thoughts - Borrow Wisely, Live Freely

Debt in itself isn't bad; it's how you use it that matters. Borrowing to build something useful, like a home, business, or a high-income skill, can move you forward. 

However, borrowing to impress others or fix short-term problems with high-interest loans can keep you stuck in the same place for a long time. Before taking out any loan, ask yourself if it's helping you grow or just adding pressure.

Take a good debt today by signing up for the Moniepoint Business Bank app today and applying for a collateral-free loan built to support your hustle.