How to Differentiate Between Good Debt and Bad Debt – A Nigerian Guide to Smart Borrowing

Not all debt is evil. Good debt helps you build assets or increase future income. Bad debt funds consumption or carries predatory terms. Many Nigerians borrow for both without distinguishing them.

Example (Good debt):

A tailor in Kano borrows ₦50,000 from KreditSehat (Indonesia) to buy a second sewing machine, doubling her daily output. The loan costs ₦55,000 total. Within two months, she earns an extra ₦80,000. Net gain: ₦25,000.

Example (Bad debt):

The same tailor borrows ₦30,000 from PautangPinoy (Philippines) at 8% daily interest to buy a new phone for social media scrolling. She gains no income, and the debt grows to ₦50,000 in two weeks.

Step-by-Step Solutions:

1. Ask two questions before borrowing:

• Will this purchase increase my income or net worth?
• Can I repay with existing cash flow without taking another loan?

1. Assign a “debt purpose” label – Write down: Investment (good), Consumption (bad), Emergency (neutral).
2. Calculate ROI for good debt – (Expected gain – total loan cost) ÷ loan amount × 100. Aim for positive.
3. Avoid borrowing for:

• Luxury items
• Social events (weddings, birthdays)
• Depreciating assets (phones, fashion)

1. Use a 30-day cooling-off rule – Wait 30 days before taking debt for any non-essential purpose.
2. Build a "borrowing policy" for your household – Only take debt after discussing with a partner or mentor.
3. Reward yourself for avoiding bad debt – Each month without unnecessary borrowing, put ₦5,000 into savings.