In Nigeria, we don’t really have student loans and the use of credit cards hasn’t quite caught on. So not many people are faced with the kind of debt issues we hear about from western countries. However, in the last few years, we have seen a large number of payday loan providers spring up. These institutions offer unsecured loans to salary earners at rather high interest rates.
Often, the question is which do I do first, save or pay off debts? The simple answer to that is, it depends.
Clearly, if you have a high interest loan, then you should focus on paying it off. And the reason is quite simple, there is hardly any investment product out there that can generate sufficient returns to outpace the interest due on those high interest loans. For example, if you have NGN500,000 in Savings (at 3 percent per annum) and NGN500,000 in loans (at 25 percent per annum). You clearly need to pay down your debt, as doing otherwise is like investing NGN500,000 and knowing for sure that you will be losing 22 percent per annum.
Be that as it may, you probably need to be doing both where you can. What do you do when an emergency occurs and you have channeled all your earnings into paying existing loans? You probably have to take on more debt, and debt becomes a revolving door.
Hence, an ideal solution is one that gives you the best of both worlds. This would involve putting some money aside to cover sudden emergencies and paying the maximum possible to reduce your loan amount. Once, you have built your emergency saving to cover at least 6-months of living expense, you can then get more aggressive in dealing with your debt (particularly high interest loans).