Creditor Definition

Creditors are people or businesses that allow others to borrow money to be repaid in the future. A business that provides goods or services to a company or individual and does not expect immediate payment also meets the definition of a creditor. 

This guide explores the basics of what a creditor is, including what it means to be a creditor, how creditors get paid, and more.

The Business Definition of Creditor

Creditors make money by charging interest on the money they loan out to other people or institutions. For example, a creditor could lend a borrower $10,000 with a five percent interest rate. Depending on the term of the loan (how long the borrower has to repay it, for example), the creditor could make quite a bit of money through that interest.

In exchange for this passive profit, a creditor accepts a degree of risk that the borrower may not repay the credit line. When extending credit, most institutions take into account the borrower’s credit history, credit score, and the size of their down payment or collateral. If someone borrows from a friend or family member, those considerations might not factor in.

Examples of Creditors

The definition of a creditor is not a one-size-fits-all description. There are many types of creditors, including: 

• Real creditors, such as a bank or credit card issuer, have a right to be repaid;
• Personal creditors, like friends or family who lent money;
• Secured creditors, such as a mortgage company, have a legal right to the property securing the loan if the borrower defaults;
• Unsecured creditors, like a credit card company, have a right to collect from a borrower even if the debt is not secured by personal property.

There are lots of different types of creditors; the definition of “creditor” covers a broad range of scenarios.

Advantages of Being a Creditor

The biggest advantage of being a creditor is (arguably) that creditors can make money by charging interest. But creditors can also make money by charging fees, such as late fees for missed payments. Transaction fees could also come into play. Ultimately, as long as borrowers accept the fees, a creditor can charge them. Savvy borrowers double-check fee terms and conditions to help ensure they aren’t surprised by out-of-control fees.

Disadvantages of Being a Creditor

Creditors take a risk when extending credit. If a borrower defaults or a debt can’t be repaid, the creditor may have to hire a collection agency or file a costly lawsuit. Often, these strategies are more expensive than the original debt.

What happens if creditors are not repaid?

If a creditor is not repaid, creditors like banks can repossess homes or cars if a loan is secured. Banks can also take creditors to court over unsecured debts. Personal creditors, like friends and family, have options to claim debts on their taxes, but only after significant efforts to recover the debt. If a personal creditor finds themselves in this scenario, it can be helpful to speak to a tax professional for advice.

Creditors: A Summary

A creditor extends credit, whether in the form of money, goods, or services. Some creditors can repossess collateral like homes and cars on secured loans and can take debtors to court over unsecured loans.

Recommended articles:

• Debtor Definition
• Line of Credit Definition
• Guarantor Definition
• Member Definition
• Member definition
• Debt Financing Definition

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