Family members may beg but co-signing a loan dangerous to your credit

In this economy, it's a common plea: family members begging you to co-sign a loan.

Your heart wants to say yes. But your mind is probably saying, "Hold on!" And for good reason.

Money managers say you should think twice before signing on the dotted line.

That simple signature could put your family's entire financial future at risk.

When Nicole's friend couldn't secure a student loan on her own, Nicole wanted to help. So she agreed to co-sign.

"I thought, if I could help someone get their education I should," Nicole said. "And I didn't ever foresee there being a problem with it."

Little did she know her friend would stop paying and the creditors would come after her instead --- garnishing her tax returns and ruining her credit.

"Never in a million years dreamt that somebody that I trusted would move away, stop making payments and not even bother to return my phone calls," Nicole said.

But it happens a lot more than most of us would think, thanks to our current economy.

According to the FTC, on certain types of loans, as many as three out of four borrowers now default on their obligations leaving the co-signer stuck with the bill.

"You need to keep in mind that you're being asked to take on a risk that a professional lender will not take," said Malian Mithal of the Federal Trade Commission.

The FTC recommends that you remember you're acting as more than a reference when you co-sign. You're technically acting as a co-borrower.

"If you don't have the funds to repay the loan they can take you to court, they can seize your possessions, they can garner your wages-they can even add on late fees and attorneys fees for the cost of the loan," said Mithal.

And remember: even if they don't default, co-signing will still impact your credit.

"It will look like you have a larger amount of obligations than you really have for yourself and it might hurt your ability to take on credit that you need for yourself," said Mithal.

Credit expert John Ulzheimer says if you are considering co-signing for a friend or family member you need to have a serious talk beforehand.

"I would ask them to provide you with a copy of their credit report so you can see if they are meeting their other loan obligations," he said. "And second I would absolutely ask them what kind of income they're currently making and what kind of stability do they have with their employer."

And keep checking-in after the loan is secured.

"You're going to want to start pulling your credit reports very frequently to ensure that the lender is receiving payment every single month and that they're reporting that it's being paid on time every single month."

Mithal adds, "You also can ask the lender to let you know any time the borrower defaults on any kind of payment...even one payment. So that you're not taken by surprise and you can deal with the situation as it's happening as opposed to when the entire loan goes into default."

And if the worst does happen, be prepared to take over the payments.

"You have to think about whether you can repay the loan yourself," said Mithal.

As for Nicole, the government garnished part of the debt and her friend finally paid back the loan. But it'll be years before her credit recovers.

"It's very frustrating to have bad credit as a result of someone else's mistake," she said.

Here's another possible solution: Skip the co-signing and offer a financial gift to your loved one instead. It can help them qualify for the loan or make monthly payments easier. And you may be eligible to get a tax benefit from the gift.