Now that you’ve learned who the players are in the debt game, we’re going to discuss types of debt. Fundamentally, there are two types of debt: secured and unsecured.

The type of debt you “play” with in the debt game may depend on a variety of factors such as your credit rating, the type of product you’re trying to purchase with debt, and regulatory limitations.

When a person or institution loans us money, they want to know when they will get their money back, how much they will be paid for their faith in us that they will get it back, and what will happen if we don’t pay it back. If a debt is secured by something, the lender expects that if we don’t hold up our end of the agreement, they can go to the security or collateral on the agreement and collect what is owed them.

If a debt is secured, it means you, as the borrower, will only receive the loan if you can offer collateral of some type to the borrower. In essence, if the lender expects either you (based on your credit history) or the loan to be risky, the lender will request collateral, or something with a value equal to the amount you are borrowing. The lender requires this to ensure that if you don’t hold up your end of the agreement, the company can collect on the loan by using the collateral to recoup what is owed.

What exactly is collateral? Collateral is something of value that we already own that can be used as a guarantee that a borrower will pay back that loan. Collateral can range from a car, boat, jewelry, or a house, depending on the size of the loan.

Similarly, if we rent a home, the landlord often takes a month’s rent in advance, the final month’s rent, and a security deposit at the time you sign the rental agreement. The money you give the landlord secures your lease agreement that you will, in fact, move in when you said you would, you will not leave without paying your last month’s rent, and you will leave the home in the condition you found it when you moved in.

Students often cannot come up with that much money up front. They may ask their parents to cosign on the lease, making the parents liable to the security on the rental agreement. That way, the landlord has recourse through either of the cosigners to get the money owed according to the rental agreement.

When you borrow money to buy a home, the mortgage lender will probably require you to put money toward the house as a down payment. The lender doesn’t want 100% of its money in the home in case it loses value before the loan is paid. The lender holds the title of ownership for the house until you pay it off.

Co-signing on a loan is, in a sense, a form of secured lending. Agreeing to be a co-signer on someone else’s loan can be a gracious thing to do for a friend or relative, but remember that business is business. Before you agree to put your signature on the agreement, be sure that you have read the terms and conditions of the contract and know what you are about to sign for. Although the borrower assures you that her plans are good and that she has no intention of not paying back her loan, “debt happens” and you may be the one ending up paying off the loan.

One of my clients was a 55-year-old widow who had most of her savings in a 401(k) tax-deferred retirement savings plan and an IRA that had been left to her by her husband. Her son decided to go into the carpet cleaning business and needed money to buy the franchise, a van and the cleaning equipment. He was confident that this was going to be a booming business, and he had dreams of a fleet of vans and a number of employees. He had dropped out of college and had only a few hundred dollars in savings to start his business.

His mother was pleased with his entrepreneurial spirit and agreed to co-sign his loan with the bank to start the business. Because her savings were all in tax-deferred retirement accounts, she became liable for the taxes at her current interest rate of 28 percent and a 10 percent penalty because she was not yet 59Yz. Even though the money was still in her savings accounts, she triggered these IRS events when she agreed to use them for collateral on her son’s loan.

Unfortunately, after a year in the business, her son had developed an allergy to the cleaning chemicals and had to abandon his business. Guess who got stuck with the loan payments! Mother will now have to work much longer than she had planned.

I love my kids, but I don’t think we as parents owe them as much as we often think we do in terms of financial help. We love and care for them as parents. We may help them to get started in a business or a career if we can afford to and choose to without guilt or obligation. But we are not required to jeopardize our own well-being or retirement to help our adult children financially.

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Okay, let’s see how you might play the debt game. Read the following situations and see what you’d recommend based on what you know about debt.

(1) You need $4,500 now. It is an emergency. What will you do? What if it isn’t an emergency how might this change your strategy?

Ideas: An emergency requires fast action. If you don’t have the cash, you need to get some, and credit cards or a personal loan from an FFA would likely be the source. If it is not an emergency, sell something you own of that value or get a part-time job for a month or two.

(2) You need over $5,000 within four weeks for an important opportunity but not an emergency.

Ideas: Work a second job, sell your car for a while and take public transportation.

(3) You know you’re going to be late paying a loan.

Ideas: You see where you can find the money to pay the loan immediately; you call the creditor and say you’ll be late on the payment; call the creditor when you pay the bill or when you discover that you will not make the date you promised to pay.

(4) You are preparing to buy a home.

Ideas: Study the housing market in your area; ask friends about their agents and if they would recommend her to you; get to know an appraiser to find out the inside opinion on preferred areas of town; get preapproved for a loan; shop the best mortgage companies.

We all play the debt game because there are times we must borrow to meet challenges and take advantage of opportunities. The important thing to remember is that as long as you are controlling the amount of your debt and paying it off in a timely way, you are ahead of the game.

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A credit union is a not-for-profit financial institution chartered by the state or federal government and owned by its members. Credit unions may be formed by any group with a common bond, such as teachers or farmers. It is governed by a board of volunteers who are elected by their fellow members, and can be formed by any group with a common bond. Because credit unions are nonprofit organizations, they don’t pay taxes on their profits the way banks do. This means they can provide low-cost financial services such as loans, checking and savings accounts, CDs, debit cards, and even credit cards. Most credit unions protect their accounts for up to $100,000 through the National Credit Union Share Insurance Fund but check with the individual credit union before you become a member.

Thanks to the Credit Union Membership Access Act, signed by President Clinton in 1998, more people are now eligible to join credit unions through associations, churches, schools, civic groups, and even members of communities. Members of these organizations are allowed to sign up immediate family members. This definition has been broad ened to include spouses, children, siblings, parents, grandparents, grandchildren, stepparents, stepchildren, and step-siblings, as well as “household members,”which includes people living in the same residence as a single economic unit. Over to 10,000 new groups have joined credit unions since 1998.

Credit unions are a great concept. At this writing, there are nearly 13,000 credit unions in the United States. While credit unions may offer higher rates for consumers on deposits (such as CDs and savings accounts) and lower rates on loan products (such as mortgages) than traditional banks, they may not compare with the rates that online banks now offer consumers.

Credit unions started through work groups where the facilities were generally located onsite. Unlike banks, credit unions are owned by the members who elect their own board of directors and have voting rights (because they are actually stockholders). If you can’t find a financial institution that will allow you to become a customer or a member due to your past financial difficulties, ask what you need to do to become financially stable in their eyes. Then work toward that goal and reapply. Talk to one of the officers of the bank or credit union when you want to initiate this conversation. Of course, ask whether they are FDIC- or NCUSIF-insured before you go further.

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