Before you cosign on the dotted line ... protect credit
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Kranitz says it took one year for workers' compensation to kick in and for the young man to receive some money because the company kept appealing. The truck was repossessed. Kranitz says he later received a letter from the bank letting him know that he had to make a couple of months' worth of payments, plus accompanying fees.

"I had a choice: Come up with more than $2,000 to get the truck back or have the bank sell it and still owe the balance on the truck." 

Krantiz chose to get the truck back, and says he sympathizes with the young man's situation, but could use the "$4,000 or so" he "lent."

3. Know how to operate like a lending institution.

How to operate like a lending institution:

• Get a copy of the borrower's credit report and credit score. • Find out if the borrower is paying his or her current bills on time by asking for current financial statements. • Make sure he or she has a steady job, and ask to see his or her W-2s. • Find out how he or she plans to pay the bills over the term of the loan. • Read the contract and understand the terms. Jones advises that you may want to have an attorney look over the contract so you know your liability. He also says doing this takes away from the "impulse buy." • Keep a copy of the contract and truth and lending disclosures. • Find out the worst-case scenario. Ask the lender to calculate exactly the amount you would owe if you had to pay for the loan. • Keep a copy of the person's personal information, such as his or her Social Security number and date of birth. • Make sure you keep his or her current address and work information up to date. • Ask the lender to put in writing immediate notification if the borrower misses a payment and that you are to receive a copy of the monthly statements. • Check in with the co-signer from time to time. Lynne Strang, spokeswoman for the American Financial Services Association, says, this way if you believe a problem is imminent you can work with the borrower to find out about other alternatives, such as refinancing, sale of the item, or some actions that can be taken by the borrower, such as finding a second job.

Once you co-sign, you can't simply walk away from the loan. That's why the most critical time is the moment before you put the pen to the paper. This is the point where you may be able to negotiate specific terms of your obligation with the lender.

The Federal Trade Commission provides this example, "You may want to limit your liability to the principal on the loan and not include late charges, court costs or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: 'the co-signer will be responsible only for the principal balance on this loan at the time of default.'"

How to say 'no'
You may choose not to sign, but rather than leave the person stung by your response, provide some alternatives. Credit counselors suggest telling the borrower that he or she can develop his or her credit by staying with one bank, getting a secured credit card, taking out a small loan or getting a gas card. Make sure to stress that he or she should keep the limits low and make timely payments.