Good Debt vs Bad Debt: A Simple Guide to Borrowing Smart

Let’s be honest — the word “debt” doesn’t exactly sound comforting. For many people, it brings up feelings of worry or regret. Maybe it reminds you of a loan that took years to pay off. But, debt in itself isn’t the problem. The problem is how and why we use it.

Think about it like this: borrowing money can either open doors or close them. It can help you take a big step forward, like paying for your education or starting a small business—or it can hold you back if it’s spent on things that lose value quickly.

That’s where the idea of good debt and bad debt comes in. Understanding the difference between the two is what separates people who use debt wisely from those who get trapped by it.

So before you swear off borrowing altogether, let’s take a closer look at what debt really is and how to make it work for you, not against you.

What Is Good Debt?

Good debt is the kind of debt that helps you grow — financially, professionally, or personally. It’s money borrowed for something that’s likely to increase in value or improve your long-term earning potential. In other words, it’s debt with a clear purpose and a plan behind it.

Think of it this way: good debt works for you, not against you. Here are a few examples:

• Education loans: Paying for school or skill-based training can open doors to better opportunities. If the course you’re taking helps you earn more later, that’s a worthwhile investment.
• Business loans: Starting or expanding a business can be risky, but if managed well, it can generate steady income over time. Many successful entrepreneurs began with borrowed capital — the key is knowing how and when to repay.
• Home loans: A house is often one of the biggest purchases anyone will make. But unlike a car or clothes, a home usually appreciates in value over time. Plus, it provides stability and comfort for your family.

Good debt isn’t just about what you borrow for, it’s also about how you manage it. Even the best kind of debt can become a problem if you take on too much or don’t have a plan to repay it. Before taking on any debt, ask yourself:

• Will this purchase or investment grow in value?
• Do I have a clear plan to pay it back?
• Will it help me reach a meaningful goal?

If you can confidently answer “yes” to those questions, you’re likely dealing with good debt, the kind that builds, not breaks, your future.

What Is Bad Debt?

Bad debt, on the other hand, is money borrowed for things that don’t grow in value — or even lose value quickly. It’s often driven by impulse or short-term thinking rather than a clear goal.

For example:

• Personal loans for luxury items: Borrowing to buy the latest phone, car or a designer bag might bring temporary excitement, but those items lose value the minute you walk out of the store.
• Unplanned borrowing: Taking loans or buying on credit just because it’s available, not because it’s needed, often leads to unnecessary financial pressure.

Bad debt usually drains your future income without offering anything lasting in return.

Teaching Kids and Teens About Debt Early

Talking to kids and teens about debt might feel unnecessary at first, after all, they’re not borrowing money yet. But this is actually the best time to start. The habits and attitudes they form now will shape how they handle money later.

Here’s how you can introduce the concept in ways they’ll understand:

1. Start with simple examples. Use real-life situations. For instance, if your teen borrows ₦2,000 from you to buy something and promises to repay from their allowance, let them experience what repayment feels like. This helps them understand that borrowed money isn’t free.

2. Explain the cost of borrowing. Show them that when you borrow, you often pay back more than you borrowed — because of interest. You can make it fun: use snacks or tokens to demonstrate how much extra gets added when repayment takes longer.

3. Talk about borrowing for value. Help them see that not all borrowing is bad. Borrowing to invest in something that grows — like education, business tools, or even books — can be wise. But borrowing for quick pleasures usually isn’t.

When young people understand how debt works before they ever need it, they’re less likely to fall into the traps that many adults face.

Debt doesn’t have to be the enemy, it’s simply a tool. Like any tool, it can build or break depending on how it’s used. When you borrow for the right reasons, with a clear plan and discipline, debt can open doors to opportunities you might not have been able to reach on your own. It can fund an education, grow a business, or help you secure a home for your family.