It happens every day of the year; a friend, who has had some problems with their own credit, wants to buy a new car, or perhaps some furniture for their apartment. The problem is that they don't have the cash do it, and because of their poor credit report, can't get the approval that they need. They approach their friend and ask if they would be willing to co-sign the loan. “I only need your signature to get approved,” they say. “You won't have to do anything else!”

Before you co-sign that loan, there are some things you should know. In reality, it isn't merely signing the loan application, but a serious proposition. What's more, if things went wrong and the friend couldn't keep up with the payments, guess who would be responsible for the loan balance? That's right—you.

If you are thinking about co-signing a loan for a friend or family member, why not first read the following in order to understand what you're about to get into.

If someone is asking you to co-sign a loan that means that the professional lender is not willing to take a risk on them. In other words, their past credit behavior has been so bad that they lender doesn't believe they will pay back the loan. What makes you so sure they will?

Responsibility

By placing your signature in the co-signers spot, you are guaranteeing that if your friend doesn't make the payments, you will. Do you have the finances to cover the loan if it came down to that? Do you really need another car payment?

Credit Report

You've obviously worked hard to keep your credit report spotless, which is why your friend wants it represented on his credit application, but did you know that if your friend misses a payment or becomes delinquent with his payments, that it could affect your credit report?

Collections

If the account does go into the collection process, it is possible that the lender could bypass your friend (who they never believed would pay the loan) and come after you first. This is true in most states, and it would be important to find out where your own state stands on this policy.

In addition, you should be aware that by co-sign on a loan for $10,000, you may actually reduce the amount of credit you will be able to get yourself because that loan will count toward your “total debt owed.”

If you do decide to co-sign for a loan, there are some steps that you should take in order to protect yourself.

First, you should ask to be notified in writing if your friend misses or is late with a payment. By knowing of any problems early on, it will help you keep the potential damage to your own credit report from getting out of control.

Next, you should also get copies of all loan documents and repay schedules. Ask for a copy of everything that your friend gets in case there is ever a dispute, you will know what legal rights you have.

Co-signing for a loan is serious business, and is something that you should think long and hard about. Even if it's your dearest friend who is asking, you have to ask yourself if they defaulted on the loan, what would that do to your friendship?