What is a creditor?

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, typically with interest. The individual or company who takes out the loan is known as a borrower or a debtor. To help lower risk, creditors often assess a borrower’s creditworthiness, evaluating factors such as credit history, credit score, income and employment.

Explore the different kinds of creditors and learn what can happen if a creditor doesn’t receive repayment.

What you’ll learn:

• Creditors may be classified as secured or unsecured. Secured creditors require collateral for a loan, while unsecured creditors don’t.

• Creditors may be categorized as personal or real. A personal creditor might be someone who loans money to a trusted family member or friend in good faith, while a real creditor uses legal contracts and agreements.

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

There are several different types of creditors. A creditor can be anything from a bank to a relative. Here’s a look at some common types:

A secured creditor is a lender that requires collateral—an asset the borrower puts up to secure a loan. Examples include the borrower’s house, car or various investments. In a secured loan, the collateral lowers the risk of the loan for the creditor. Examples of secured creditors include financial institutions that provide mortgages and car loans.

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

Friends or family members who loan money are the most common examples of personal creditors. However, a business may also be classified as a personal creditor if it provides an immediate service or product but allows for delayed payment without a legal contract. These businesses may sometimes be called trade creditors. An example of a trade creditor could be a neighborhood plumber who completes work and then says they’ll send you an invoice at the end of the week.

The absence of a legal arrangement with debtors is what sets personal and trade creditors apart from those known as real creditors. Real creditors use legal contracts and loan agreements to protect them in case the borrower doesn’t pay. Examples of real creditors are mortgage lenders or credit card companies.

If you don’t pay a creditor, they could take a number of actions, including:

• Charging late fees: 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 a borrower misses a payment. Over time, that could increase the total amount due. A penalty interest rate may also make future borrowing more expensive.

• Alerting credit bureaus: If an account goes delinquent, creditors can also report the account as past due to the credit bureaus, which may hurt the borrower’s 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. Secured creditors have a legal claim to collateral and can seize the property.

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

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