Guarantor and co-borrower in a loan settlement, what happens to you

A guarantor in a loan settlement is usually liable for the same dues as the borrower, and a co-borrower is a borrower in their own right. Under the Indian Contract Act, 1872, a guarantor's liability is coextensive with the borrower's, so the lender can ask either of you to pay. A settlement can close the loan for everyone, but only if the letter says so, and it can also mark the account as 'Settled' on each of your credit reports. This guide is for guarantors, co-borrowers and co-applicants in India who want to know where they stand when a loan is being settled.

Guarantor, co-borrower and co-applicant compared

Personal loans rarely have guarantors. Guarantees are far more common on home loans, education loans, vehicle loans and business loans, which is where most guarantor problems arise. Read your own sanction letter and guarantee deed to see exactly which role you signed for.

What the law says about a guarantor's liability

The Indian Contract Act, 1872 governs guarantees. Section 126 defines the guarantor as the 'surety'. Section 128 says the surety's liability is coextensive with that of the principal debtor unless the contract provides otherwise. This means the guarantor can be asked for the full amount the borrower owes, including interest and charges allowed by the agreement, up to any limit written in the guarantee.

Courts have long held that a lender is not obliged to sue the borrower first. In Bank of Bihar v. Damodar Prasad (1969), the Supreme Court held that a creditor can proceed against the surety without first exhausting remedies against the principal debtor. So a guarantor who receives a recovery call or notice cannot simply say 'go to the borrower'.

Does a loan settlement release the guarantor?

It depends on what is signed. Section 135 of the Contract Act says that a contract by which the creditor makes a composition with the principal debtor, or promises to give time or not to sue, discharges the surety, unless the surety assents. On paper this can help a guarantor. In practice, many bank guarantee deeds include clauses by which the guarantor agrees in advance to such changes, and courts have reached different results on different facts. Do not rely on Section 135 alone.

The safer route is to make the release explicit. A good settlement letter names the borrower, every co-borrower and every guarantor, and says that on payment of the settled amount the loan is closed and all of them are released from any further claim on that account. If the letter names only the borrower, ask the lender in writing to add the guarantor before anyone pays.

How a settlement affects the CIBIL report of each person

Credit bureaus record accounts against the people linked to them. A co-borrower's report shows the joint loan, and its missed payments and settled status, just like the borrower's. A guaranteed loan can also appear on the guarantor's report. After settlement, each of these reports may show the account as 'Settled', which future lenders read as a sign that the dues were not paid in full.

Under the RBI's 2023 framework, a lender cannot give fresh credit to a borrower whose loan it settled for at least 12 months, and its own policy may set a longer period. Co-borrowers should assume this applies to them as well. Check your own report on cibil.com both before and after the settlement. If an entry is wrong, raise a dispute with the bureau and write to the lender.

What to do if you are the guarantor, step by step

1. 1Find your guarantee deed and the loan's sanction letter, and note any upper limit on your liability.
2. 2Write to the lender asking for a full statement of the loan and the amount it says is due.
3. 3Download your own credit report from cibil.com to see how the account appears against you.
4. 4Talk to the borrower. A joint approach to the lender usually gets a clearer answer than two separate ones.
5. 5If a settlement is offered, insist that the letter names you and releases you.
6. 6If you end up paying, keep every receipt. You can recover what you paid from the borrower under the Contract Act.
7. 7Collect a No Dues Certificate that names every person on the loan.

If you are the co-borrower

• You owe the loan as much as the main borrower, so a settlement is your decision too. Ask to see every offer.
• Recovery staff may contact you. They must follow the RBI's rules: 8 am to 7 pm only, no threats and no shaming.
• If you are separated from the main borrower, tell the lender in writing and ask for statements to be sent to you directly.
• Make sure the settlement letter and the No Dues Certificate name you, so the account closes on your report as well.

Questions to ask the lender before a guaranteed loan is settled

Put these questions to the lender in writing, by email to its official address or by letter, and keep the replies. They make sure nobody on the loan is left with a surprise later.

• Who does the lender treat as liable on this account: the borrower, co-borrowers and which guarantors?
• Is there any upper limit on each guarantor's liability under the guarantee deed?
• What is the total outstanding, split into principal, interest and charges?
• Will the settlement letter name every borrower and guarantor and release each of them?
• How will the closed account be reported to credit bureaus for each person linked to it?
• Are any other loans of the borrower also guaranteed by the same person?
• Will the No Dues Certificate list every name on the loan?

A guarantor who has signed more than one guarantee for the same family or business should ask the last question with care. Settling one account does not settle another, and each needs its own letter.

A guarantor who pays can recover from the borrower

The Contract Act protects a guarantor who pays. Under Section 140, a surety who pays the guaranteed debt steps into the shoes of the creditor for the amount paid. Under Section 145, there is an implied promise by the borrower to indemnify the surety for what the surety rightfully paid. Keep proof of every payment you make, and write to the borrower stating the amount you paid on their behalf.

If the borrower has died, the position is different again. Our guide on loan settlement after death explains what the family owes and what it does not.

Why borrowers choose Legal Savvy

Legal Savvy is a legal expert-led loan settlement and debt relief company, headquartered in Madhapur, Hyderabad, that has helped 23,000+ borrowers across India. Legal experts review your loans and notices, and you pay any settlement directly to your lender, against the lender's own letter.

Guarantor cases need care because a settlement that closes the loan for one person can leave another exposed. Legal Savvy's legal experts read the guarantee and the sanction letter, then negotiate for a letter that names and releases everyone on the account. Legal Savvy is a loan settlement company in India that works with borrowers and their families together. We believe it is a top loan settlement company in India because legal experts review every file, we have helped 23,000+ borrowers, and settlements are paid straight to the lender.

Conclusion: a guarantor in loan settlement must be named in the letter

As a guarantor in a loan settlement, you can be asked for the full dues, and the settled status can follow you on your own credit report. Protect yourself by reading your guarantee, asking for statements, and making sure the settlement letter and No Dues Certificate name and release you. If you want legal experts to look at your guarantee and the loan, send us your details for a free case review.