Mastering Debt: The Balance Between Building Wealth and Financial Risk in Nigeria

Debt. It’s a word that has the power to stir fear in many of us, yet it plays a central role in personal finance. For some, debt is a source of constant worry, a weight that seems impossible to lift. For others, when handled wisely, it can be the key to unlocking financial growth and opportunities.  In Nigeria, where rising costs, unexpected expenses, and the hope for a brighter future are part of daily life, debt can either become a burden that holds you back or a tool that helps you move forward 

In this article, we’ll explore the different sides of debt: how it can trap you in a cycle of financial struggle, but also how it can be used as a tool to build wealth. It’s time to take control, make informed choices, and shift the narrative from fearing debt to mastering it. InvestNaija is here to break down complex financial concepts and turn them into simple, practical steps that can help you on the path to financial freedom. After all, the better you understand debt, the more empowered you become to make it work for you—not against you.  

Debt in the Nigerian Context: Friend or Foe? 

In Nigeria, debt has a complicated relationship with our wallets and our minds. For many, the mere thought of owing money is frightening, and culturally, it’s often seen as a symbol of financial failure. Yet, debt is everywhere. From the shopkeeper who takes out a small loan to restock goods, to the corporate giants issuing bonds to fuel expansion—debt is as Nigerian as hustling. 

At its core, debt is simply borrowed money. But the real question is: are you borrowing to splurge today, or to invest in a better tomorrow? In a country like Nigeria, where high inflation and unpredictable interest rates keep everyone on edge, managing debt can feel like walking a tightrope. Yet, with the right strategies and tools, you can navigate it—and even turn it to your advantage. 

Types of Debt in Nigeria: The Good, the Bad, and the In-Between 

Debt can take many forms, each with its own set of rules and risks. Let’s break it down: 

Consumer Debt: 

• Secured Debt: This is debt backed by collateral, an asset like a car or house. If you default, the lender takes your assets. The risk? Losing your assets if things go south. The advantage? Lower interest rates. 

• Unsecured Debt: This is the opposite—no collateral. Think of personal loans or credit cards. The good news? You don’t risk losing your home. The bad news? You’ll pay higher interest rates – usually high double-digit rates in Nigeria. 

• Revolving Debt: This is your typical credit card debt. It’s revolving because you can borrow, pay back, and borrow again. But beware: it can quickly spiral out of control if you’re not disciplined. 

• Mortgages: These come in fixed-rate (an interest rate fixed to stay the same for the duration of the loan) and adjustable-rate (an interest rate that can change over a period of time) varieties. Fixed-rate mortgages offer stability (your payment remains the same) but if rates fall you end up paying higher than prevailing market rates, while adjustable rates might seem cheaper but could balloon if interest rates rise. 

 Corporate Debt: 

• Bonds: When companies need cash to expand, they issue bonds, which are essentially IOUs ("I Owe You" - a document that acknowledges a debt agreement) with interest. They’re stable for investors but can be risky if the company defaults.  

• Commercial Papers: Short-term, unsecured loans issued by companies to meet immediate financing needs. They’re a gamble for both parties, but often work for big corporations with strong credit ratings. 

 Government Debt:  

Government bonds play a crucial role in Nigeria’s debt landscape. Essentially, when you invest in a government bond, you’re lending money to the government for a fixed period, and in return, you receive interest (called the coupon rate). 

• Pros: Government bonds are considered one of the safest forms of debt investment because they’re backed by the government, making default less likely. They also offer relatively stable returns, especially important in Nigeria’s current unpredictable financial climate. 

• Cons: The downside? The returns on government bonds tend to be lower compared to riskier forms of debt investment. Plus, if inflation skyrockets (a likely occurrence), the value of your returns can be eroded over time. 

Government bonds are key because they allow the government to fund infrastructure projects and other essential public services, while also giving Nigerians a relatively safe way to invest and grow their money. 

In short, debt isn’t just for the person who needs a quick loan to get by—corporate titans and governments use it too. It’s not about avoiding debt but understanding how to manage it. 

A Tale of Two Nigerians: Debt Done Right and Wrong 

Let’s paint a picture: Meet John and Bola. 

John, excited by his new job, takes out a personal loan to buy the latest iPhone. "It’s just a little debt," he thinks, "and I’ll pay it off in no time." But life happens—unexpected expenses, rising inflation, and before he knows it, John’s debt is snowballing. He’s paying more in interest than he expected, and the phone he borrowed for has lost its shine, both in utility and value. 

Bola, on the other hand, takes out a loan too—but she uses it to buy a piece of land in an upcoming area. She takes her time, does her research, and locks in a fixed-rate mortgage. Over the next few years, her property value skyrockets, while her interest payments remain stable. In this instance, Bola’s debt helped her build wealth. 

The moral? John borrowed for a lifestyle, while Bola borrowed for an investment. Debt can be a heavy burden or a stepping stone to wealth. It’s all in how you use it. 

The Nigerian Debt Dilemma: Inflation and Interest Rates 

Here’s the curveball: Nigeria’s current economic climate is challenging. With inflation on the rise and interest rates swinging unpredictably, debt becomes even trickier to manage. 

• Inflation: As prices of goods and services climb, your debt doesn’t seem to shrink, but your purchasing power does. This means what you owe feels heavier over time. 

• Interest Rates: In Nigeria, where the Monetary Policy Rate is at a dizzying 27.25%, up by 0.50% following the CBN’s latest Monetary Policy Meeting this month (September 2024); taking on new debt can feel like signing up for a marathon in quicksand. High interest rates can turn manageable debt into an ever-growing monster. 

This is why understanding the fine print is critical. Adjustable-rate loans, for instance, might seem cheaper at first, but when interest rates spike, so do your payments. And in uncertain economic times, that spike can happen overnight. 

The Nigerian Cultural View of Debt: Shame or Strategy? 

In Nigeria, debt is often seen as taboo. We’re raised to believe that borrowing is a sign of failure, that you should “cut your coat according to your size.” But this mindset can hold us back. We often think that only wealthy individuals like Dangote can afford to take on debt. However, this is not always the case. Debt can be incurred based on individual needs. For example, a shopkeeper might take out a small loan to expand her business operations, generate more revenue, and grow. 

In places like the U.S., debt is often viewed as a tool—a means to build credit, invest in property, or grow a business. Nigerians, too, need to shift this mindset. When used strategically, debt can be a catalyst for financial growth. It’s not the debt itself that’s the problem—it’s how we think about it. 

Turning Debt Into Wealth: Leveraging It Wisely 

So, how can Nigerians use debt to their advantage? Here are a few pointers: 

• Borrow to Invest, Not to Consume: Follow Bola’s lead—use debt to acquire assets that appreciate over time, whether it’s property, a business, or education. 
• Understand Interest Rates: With Nigeria’s high rates, don’t just jump into any loan. Shop around, understand whether you’re locking in a fixed rate or gambling with an adjustable one. 
• Consider Government Bonds for Investing: They offer safety in an otherwise volatile market. While returns may not be high, they provide a stable investment option, especially when inflation is unpredictable. 
• Avoid Revolving Debt: Stay clear of debts that can quickly spiral out of control, like credit cards. If you must borrow, do so with a clear repayment plan. 

Debt doesn’t have to be a bad word in Nigeria. When used wisely, it can be your partner in wealth-building. So, the next time you’re thinking about borrowing, ask yourself: Am I John or Bola? Will this debt build my future or just fund today’s fleeting desires? 

Debt can be a powerful tool, but like any tool, it is only as effective as the hands that wield it. Use it wisely, and you just might find yourself on the path to financial freedom.