Smart Money with Arese: The Debt Conundrum

‘Neither a borrower or lender be’ – Shakespeare

We’ve all been there! You lend money to a friend who is supposedly in ‘need’ and you get burnt! Their attitude becomes so belligerent that you start to believe the saying that ‘no good deed goes unpunished’. Then somewhere down the line you are caught in the same situation and another friend asks to borrow money, you are torn between your need to ‘help’ and be considered good person and the fear that you may never get your money back.

So as I got older and the financial responsibility of being an adult got real, I realized that there is an opportunity cost for every Naira I spend. Therefore I had to think carefully about lending money that I may never get back. So I developed a new policy.

As a rule I never lend friends money! It sounds mean but it’s honest. If a friend is in need you must first determine whether this problem is an actual problem or not and then calculate how much you can afford to give them by way of a ‘charitable donation’ towards this problem. It must be money you can afford to forget about. So ‘paying your debt for Brazilian hair’ or paying your travel agent for a ticket to London cannot be the opportunity cost for my daughter’s diapers.

I find that a lot of emphasis is often placed on the perils of bad debt for the debtor and not a lot is placed on the impact a bad debt can have on the lender. There are numerous stories of people who have borrowed money they had set aside for their children’s school fees to their brother who is in ‘need’ with the hopes that they will pay back and when the loan goes bad, they run into financial difficulty. Although culturally, we are geared towards helping others, its important to be discerning when it comes to making decisions about who to lend to and why you are lending them money. (There are some exceptions to the rule, some people have real problems!)

So here are some tips on how to identify people you should never lend money to and what we can learn from their bad debt habits.

3 ways to spot a perpetual ‘onigbese’! (constant debtor) and what you can learn from their mistakes.

They think debt = free money!
Bad debtors generally don’t have a healthy respect for other people’s money. When its time to borrow money their problems are always more important than your own but when its time to pay back you’ll hear statements like ‘is it not just N100, 000’.

Their bad debt habits usually transcend the individual level. These are the sort of people who will borrow money from a bank to start a business, use their uncle’s land as collateral and then spend the money buying a luxury car, renting a flat in Ikoyi and building a tab in all the ‘it bars’ in Lagos. This typically happens because they start spending their profits before they have even started the business. Then when the business fails as a result of misuse of debt, and default charges on the loan start to pile up because of their disregard for other people’s money the consequences become the responsibility of the owner of the collateral and the bank.

What to learn from this: If you borrowed money to grow a business, then by all means grow a business! Don’t convince yourself that buying a luxury car will somehow help increase your profits because if you ask the average Nigerian entrepreneur what their no 1 challenge is, the answer is almost always ‘lack of access to capital’. However, a good percentage of the lucky few who manage to convince a bank to loan them money for their business misuse it because they have the wrong attitude to debt.

They drive more expensive cars than their landlords.
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. For example, Toyin drives a N20m car and is still paying off her car loan but doesn’t own her own home so she still pays rent to her landlord. A car is an asset. Granted! But it is a depreciating asset, which means it begins to lose value as soon as you drive it. Therefore it doesn’t make sense to go into debt to acquire a car your current income cannot support.

What to learn from this: Debt can be a useful tool to attain financial success but how you use it matters. Wealthy people use debt as a tool to leverage their investments and grow their cash flows but poor people use debt to buy things that make rich people richer. Only borrow to acquire an asset that will appreciate in value.

They haven’t paid salaries but they are on holiday in Dubai.
People with bad debt habits think their WANTS supersede the NEEDS of others. So for example, they think Wasiu the driver’s salary can wait for another few months when he most likely has obligations of his own (children’s school fees, transportation and food costs) but they are eating out every weekend and buying things they can probably afford to put on the back burner till after they’ve paid their staff.

What to learn from this: A real boss guarantees his team eats (ask Rick ross). So if you haven’t had money to pay your domestic staff for 2 months but you are buying business class tickets to Dubai and eating at ‘Spice’ every weekend. God is watching you in 3D!

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