In my financial classes, I always endeavour to emphasise this basic fact that an average employee in Nigeria is or likely to be in debt. Not because they are not earning reasonable salary, but they lack the money management skills, knowledge of money or how to use debt to their own advantage.
These days, getting into debt is quite easy for salary earners, most especially with the tricky tactics of some microfinance banks posing as 24-hour loan facility houses. These access-loan-easily financial houses are out to help their clients (salary earners) turn their luxury fantasies into reality but leaving them with the trouble of how to get out of debt. However, there is no getting out of debt except you understand debt and how to use it to your own advantage.
What is debt? It is simply an obligation owed by one party (the debtor) to a second party (the creditor). A debt is established when a creditor decides to lend a debtor a sum of asset. Debt can be referred to a form of asset giving to the debtor by the creditor.
In finance or in the business world, we say debt is the strategy of using anticipated income and future purchasing power in the present. So debt is simply an amount of money borrowed by one party from another with the intention of repaying the loan in the future.
Debt can be classified into good debt and bad debt. Both are accessible through financial houses or money lenders. Both can be secured by the debtor from the creditor with or without accruing interesting. However, they serve two different purposes that earned them the adjectives, “good and bad”.
Good debt is money borrowed by a party from another for the sole purpose of investing it in a financial vehicle or more so that it can generate cash flow and profit consistently over a long period of time which exceed the duration of the debt repayment plan.
For example, top managers in corporate organisations borrow large amount of money from banks invest it in the stock market or other forms of financial vehicles and hopefully look forward to offset the loan over a giving period of time while the borrowed capital continue to make profit for them.
Another good example is borrowing money to acquire rental property, which has the tendency of generating cash flow and profit that can repay the loan over a period of time. For clearer understanding, good debt is money borrowed to acquire asset that can generating income over a long period of time.
These type of debt, most time favours corporate organisations with proper money management skills and excellent cash flow system. This Corporations approach financial institutions for large loans to expand their businesses or purchase large equipment and pay back over a period of time.
Although some small and medium scale enterprises have or are benefiting extensively from such facility too, large corporations, because of their reputation, are the ones utilising this platform to become bigger and stronger. This explains why the rich will continue to get richer and you already know what will become of the poor. These days, some individuals, with well paying jobs, who also have the knowledge of money are also leveraging on this good debts to get richer. You too can leverage on it if you have the basic knowledge of money.
Bad debt, on the other hand, is money borrowed by a party from another for sole purpose of investing in liability such as buying a home, sleek car, or any material things for personal use. Purchasing these luxuries might seem to be assets to those who do not have the knowledge of money; but they are not.
This explains why many average Nigerians, ignorantly, are in debts. The fulfilment of owning your own dream car or home might look good, but these luxuries starts taking money from your pocket, from the very first day, in the form of maintenance. And once it is taking money from your pocket, it is a liability and can automatically turn your good pleasure into bad debt if you don’t have a solid repayment plan.
A debt can turn out to be bad if what it is use for is not in any way paying back the debt or making profit for the debtor. Even if you have a very good job with the capacity to pay back the loan over a period of time, you are simply one of the luckiest few who have the capacity to pay back a bad debt.
