Is someone you care about having trouble getting a loan because of a low credit rating?

They might ask you — or you might offer — to co-sign the loan contract. This means you promise to re-pay the loan if the actual borrower fails to do so. If your own credit is good, having your signature next to the borrower's can make the difference between the lender accepting or rejecting the application.

Related: 5 Smart Ways to Protect Your Credit Score

Co-signing a loan is a common enough way of helping a child get a college education, buy their first car or finance a starter home. One out of five parents who help their children buy a home do so by co-signing the loan according to mortgage lender loanDepot LCC.

The good news is that most young adults who take out a loan with a co-signer — usually a parent — pay their bills on time, according to the credit rating agency Experian. Still, the same study reports that an estimated eight percent missed payments or went into default. This is when things can get sticky for the co-signer.

Risks of co-signing

It can harm your credit and finances. If the loan goes into default, that can end up as a negative item on your credit record. Depending upon the terms of the contract, the lender might also garnish your wages or confiscate your assets.

Even if the borrower pays on time, guaranteeing a large loan can make you a credit risk in the eyes of future lenders. Should you apply for another loan just for yourself, you might be rejected because you already “owe” too much money on the co-signed loan, according to the Federal Trade Commission (FTC).

The borrower might become unwilling or unable to pay. You're taking a risk on a borrower that a professional lender isn't willing to take themselves, according to Colorado Legal Services. If the borrower misses payments, loses a job, gets into an accident or hops a night flight to South America never to be seen again, the bill collector will show up at your door demanding their money.

It's hard to back out. Once you guarantee a loan, the lender may be reluctant to let you off the hook if you change your mind later. For instance, ninety percent of co-signers on private student loans are unable to get the lender to release them from their obligations, according to the Consumer Financial Protection Bureau (CFPB).

Predatory loan contracts can victimize you.The CFPB study found that many private student loan contracts contain harmful clauses hidden in the fine print. In some cases, a lender can declare the loan in default just because the co-signer failed to keep a different, unrelated loan — such your car loan — in good standing.

Related: What Happens If I Default on My Student Loan?

Before you sign

  • Don't co-sign for a larger debt than you're able to repay all by yourself.
  • Ask the lender for a “co-signer's notice” that spells out your obligations regarding repayment of the debt, advises the FTC.
  • Read the loan contract thoroughly and obtain copies of all pertinent documents. It's the signed contract, not the co-signer's notice, that makes you liable for the debt, notes the FTC.
  • Negotiate with the lender to limit your obligations. For instance, they might agree that you won't be liable for late fees or legal expenses.
  • Get the lender to agree to contact you promptly if any trouble arises. Not all lenders will do this automatically. In the Experian study, 17 percent of co-signers whose loans were in bad standing didn't find out right away that a problem existed.

Consider alternatives to co-signing. For instance, you can take out the loan yourself, then make arrangements with your loved one to pay you back later. However, this method won't help them establish a good credit rating.

Related: Struggling Financially? 5 Ways to Avoid Foreclosure

David Arv Bragi is a freelance journalist and marketing consultant. He has been writing about health and safety issues since the 1990s and currently lives in Portland, Oregon.