What Happens When Your Co-Borrower Defaults On Loan EMIs

If two individuals borrow together—say, for a house, a car, or studies—the repayment burden is collective, and so is the risk. Taking a joint loan can look like an intelligent option to boost borrowing capacity or divide equated monthly instalments (EMIs), but it has one key condition: if the co-borrower defaults, so do you.

In a joint loan, both the borrowers sign the agreement and are equally held responsible for paying the loan in total. If one individual doesn’t pay their part of the EMIs, the bank holds the other borrower equally responsible for the default. That means you may have to pay the entire EMI until the dues are paid.

Most lenders do not divide responsibility along contribution lines. Regardless of whether you are the main or supplementary applicant, your responsibility is not merely moral, but also legal. This holds true for all types of joint loans—home, personal, car, or student loans.

Credit Score Damage

One of the direct consequences of your co-borrower defaulting is a blow to your credit score. Even if you were timely with your share of the payment, a delayed EMI by your co-borrower will adversely affect your credit score, as well. This can reduce your prospects of getting future loans or credit cards.

The credit reporting system will not identify the individual who failed to make the payment—it will only record the fact that the loan was not paid according to schedule. Defaults over time will further decrease your creditworthiness. 

Legal Responsibility And Pressure To Recover

If EMIs are not paid for a long time, lenders can file legal cases or initiate recovery proceedings. This may include collection agents contacting borrowers, issuing legal notices, or even seizing jointly owned assets if the loan was collateralised.

In secured loans, such as home or automobile loans, the property itself can be repossessed by the lender. But if the recovered amount is less than the due amount, the lender can still sue the co-borrowers for the remaining amount. In unsecured loans, lenders can go to court to recover the amount.

Manmeet Kaur, partner at Karanjawala & Co., a legal firm, says, “Upon repeated defaults and the account being classified as a non-performing asset (NPA), the co-borrowers are liable to be pursued by the concerned banks or financial institutions through legal action under the SARFAESI Act before the Debt Recovery Tribunal (DRT). In such cases, the lender has the right to take control of the mortgaged property for recovering the loan amount.”

When Co-Borrower Becomes Insolvent Or Goes Missing

If your co-borrower cannot be reached, files for bankruptcy, or dies, the obligation to pay remains very much yours. Banks do not take into consideration any arrangements or understandings between co-borrowers; what they are concerned about is repayment.

In these situations, not only is the financial cost passed on to you, but the legal hassle and emotional stress can be overwhelming—particularly if no legal contract existed between the borrowers beforehand.

Kaur adds: “If the co-borrower is unable to pay the full EMI, then you have an option of paying a part amount to avoid default. However, in so doing, you may end up with higher interest payments and jeopardising your credit record. Thus, it makes sense to go to the bank in order to find out the whole thing about the payment amounts of the loan.”

Can You Recover From A Co-Borrower

Though you are obligated by law to return the entire loan, you can seek legal recourse against your co-borrower for recovery of your excess payments. This is typically done by filing a suit for recovery of dues, which is time-consuming and expensive.

Having a well-drafted agreement or promissory note between co-borrowers during loan sanction can facilitate determination of liability and ease of legal proceedings in case of default.

Checklist Before Signing A Joint Loan

Prior to becoming a co-borrower, it is essential to understand the other party’s financial habit and repayment capabilities. Although it sounds uncomfortable, it can keep you safe from monetary harm later on.

 Also, consider implementing a co-borrower contract explicitly laying down each party’s share of EMI, payment schedule, and actions to be undertaken in case of default. Although not necessary, having such a contract can act as valuable proof in court.

Selecting a loan protection insurance covering both borrowers in the event of death or disability can also decrease future financial pressure.

Cancelling Your Name From A Joint Loan

After a joint loan is sanctioned, getting your name struck off as a co-borrower can be tricky. It is generally done through refinancing or balance transfer of the loan in an individual’s name, as approved by the lender and subject to the repaying capacity of the remaining borrower. It may prove difficult if the default has already taken place and credit scores are influenced.

Joint loans can provide financial leverage, but they also involve shared risks. If your co-borrower defaults, the impact can be instant and long-lasting—from EMI burden to credit damage, and legal complications. It makes sense to tread cautiously, anticipate contingencies, and legalise agreements upfront. After all, financial choices undertaken jointly must also have safeguarding for when things do not go right.