What is a creditor?

When you take out a loan, whether it’s a line of credit, a mortgage, a student loan or any other example, the institution or person you borrow from is known as a creditor. The individual or company who takes out the loan is known as a borrower, or debtor.

That’s the quick and easy definition, but of course there’s a lot more to creditors and their relationship to borrowers. Explore the different kinds of creditors and what can happen if a creditor doesn’t receive repayment.

What you’ll learn:

• A creditor is an individual or institution that agrees to extend credit or loan money to be repaid within a mutually agreed-upon time frame, often with interest.

• There are multiple types of creditors, including secured and unsecured.

• Unpaid debts can result in late fees, interest charges and other penalties, including legal action. Missed payments can also affect borrowers’ credit scores.

A creditor is an individual or institution that lends money or extends credit to a person or organization. That loan is expected to be repaid within a mutually agreed-upon time frame, often with interest.

Creditors have played a major role in global financial systems for millennia. In fact, creditors are mentioned in the Code of Hammurabi from ancient Babylon, dating back to around 1750 B.C.

Today, a creditor can be anything from a global bank to a relative. Anyone who lends money on condition of repayment can be classified as a creditor. The basic concept has been the same for thousands of years. Although these days, the credit system is more complex.

Understanding the role of creditors in today’s economy starts with discussing the different types of creditors out there. Some examples include secured creditors and unsecured creditors. But no matter the type of loan, creditors often assess each borrower’s creditworthiness, evaluating factors that could include credit history, credit score, income and employment.

A secured creditor is a lender that requires collateral. Collateral is an asset the borrower puts up to secure a loan. Examples include the borrower’s house, car or various investments. Secured creditors use collateral to lower the risk of the loan. Secured creditor loans can also be known as secured debt. This variety of creditors often provides large loans such as mortgages and car loans.

An unsecured creditor provides credit without the need for collateral. Because they don’t require collateral, these loans may have higher interest rates than secured versions. Common examples of unsecured creditors include credit card companies and personal loan providers.

Depending on the borrower and the creditor, missing payments could result in a number of possible actions, including:

• Charging late fees and other penalties: When a borrower misses a payment, creditors may charge a late fee. These fees can accumulate and increase overall debt.

• Applying penalty interest rates: Some creditors may apply a penalty interest rate when you miss a payment. Over time, that could increase the total amount due. In addition, penalty interest rates may also make future borrowing more expensive.

• Alerting credit bureaus: If your account goes delinquent, creditors can also report your account as past due to the credit bureaus, which may lower your credit scores.

• Taking legal action: If a debt goes unpaid for long enough, creditors could file a lawsuit to recover the unpaid debt. In this situation, they could possibly obtain a judgment to garnish wages, seize bank accounts or place a lien on a property.

Creditors play an important role in the economy, helping people purchase items they otherwise may not be able to afford, such as a house, a car or school tuition. Paying loans on time can help avoid fees—and it’s also one way to build credit.

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