Linda and Stacy were best friends in college. One day, Linda wanted to buy a car, but didn't have the credit. Stacy went into the dealership with Linda and signed her name to the paper to help Linda get the car. Time went on, Linda and Stacy graduated the next spring and they went their separate ways only talking on occasion. One day, out of the blue, Stacy received a collection notice for additional charges on a voluntarily surrendered car. Upon inspection of her credit report she found it was down more than one hundred points in one year.
As absurd as this may sound to those outside of the financial industry, it is a rather common occurrence on credit reports. When someone signs his name to a contract--whether for himself, a friend, family member or a company--he is tying himself and his credit history inextricably to the payment history for that account. To compound the problem, lenders are usually under no obligation to notify every single person associated with a contract that a delinquency has occurred. Typically, they fulfill their only responsibility by notifying the primary borrower that the derogatory remark has appeared.
Even if no derogatory information appears, having additional debts on the credit report can still create problems. Another common scenario happens when someone has his own car loan and has cosigned for a friend's loan. He goes to get a mortgage or student loan, but is denied because it is determined that he doesn't make enough money to satisfy the debts appearing on the report. The fact that he is not primarily responsible for one of those debts does not matter to most lenders.
This is not to say that friends can never get a helping hand. There are other ways to prudently assist your comrades. A good rule of thumb is to never sign your name to a payment that you could not afford to take over yourself. Also, if you can afford to do so, it is better in the long run to lend a friend some money for a down payment than sacrifice your credit history and future well being. For the sake of your friendship and sanity, it is better to assume that any money you lend may never be returned. Things happen, people change. We all want to be nice, but it is important to consider your future when asked to assist a friend.