Co-signing a loan for someone is a great option to help them build their credit. If the process goes well, it can boost your credit as well. However, before you sign on the dotted line, it is important to protect yourself and your credit. 

Choose Someone You Really Trust

Before you co-sign a loan for another person, make sure it's someone you can trust. Unless the person in question is a family member or close friend, you might want to reconsider before adding your name to the loan application. If you don't know the person well enough to have hard conversations about potential roadblocks and concerns about repayment, then it likely isn't a good idea to become a co-signer. 

The Loan Impacts Both Credit Ratings

When you co-sign a loan for another person, you are just as responsible for its repayment as the primary borrower. This means that if the person stops paying the loan, the lender will pursue you for payment. If their payment history is spotty, your credit will be impacted. Many people have this one out of the many credit myths that co-signer don't have to bear the repercussions of inability to make payments by the principal borrower. The truth is that a default in payment will reflect on both of your credit reports. Your score will be impacted and your payment history will have this negative inclusion, which other creditors will be able to see. 

Ask for Copies of Everything

If you do opt to co-sign a loan for someone, ask for copies of everything. This includes the loan agreement and any information provided by the lender regarding repayment policies. Also ask for a written copy of the repayment plan, so that you know when payments are due, the cost of each payment and the interest rate. This ensures that you can closely monitor the account to mitigate any adverse impact. 

Avoid Lengthy Loans

If you decide to co-sign for a loan, try to avoid any overly lengthy loans. Something that can be repaid in a year or two means less time for things to astray with the loan. However, a loan that stretches out over five, six or seven years only provides more time for the borrower to run into financial trouble and negatively impact your credit rating. 

Intervene at the First Sign of Trouble

If the situation starts going south, don't wait until you've both taken the hit on your credit. If the individual in question is someone you know well enough to co-sign a loan, then they are close enough to you to discuss a strategy if they find themselves in financial hot water. The minute you find out about a late payment or the person says they are having issues repaying the loan, intervene. You may need to pick up on the payments temporarily to avoid taking the hit on your credit. 

During the repayment period, it is also important to carefully and closely monitor your credit report. This way, you are aware of what is happening to your credit during the life of the loan. Credit monitoring can help to protect you during the repayment period, an important consideration if you opt to become a co-signer for someone else.