Debtor
Borrower
Borrower summary:
You're a borrower when you receive money, goods or services upfront and you agree to repay the creditor in the future.
Borrowers typically owe a debt to a creditor. Another name for a borrower is debtor.
Borrowing money isn't always bad—it depends on what the money's used for and whether you can pay it back as agreed.
Borrower Definition and Meaning
A borrower is a person or business that enters an agreement to receive money (or goods or services worth an amount of money) that they'll pay back at a future time, according to terms set out in a contract or agreement. Typically, the borrower also agrees to pay interest and/or loan fees on top of the original amount borrowed.
The term borrower is used in many financial and legal documents. A borrower can also be described as:
Debtor
Lessee
Customer
Buyer
Debt holder
Always read your contracts carefully so that you're familiar with the terminology. This can help prevent misunderstandings about what's required and who requires it.
More About Borrower
There are several ways to complete a transaction without paying in full. For example, you might have a tab at a bar, put your drinks on it when you visit, and pay it off at the end of the month. Your business might purchase office supplies with a credit card and pay the balance down with monthly payments. And if you own your home, you probably borrowed money from a mortgage lender to close the deal. Your monthly payments include some amount for interest to the creditor.
Your debt might be sold to a different lender or investor. As a borrower, you're legally entitled to know who owns your debts. Debt collectors are required to give you this information around the time they first contact you. They also must provide any associated account numbers and an itemization of the debt, fees, payments, and credits.
Key Characteristics of a Borrower
Every lender will have its own specific criteria for borrowers. Typically, lenders consider factors on a list known as the 5 Cs of Credit:
Character. Lenders weigh your financial reputation, as illustrated by your credit history. Lenders want to see a history of on-time and full debt repayment.
Capacity. This measures your ability to repay your debts based on your debt-to-income (DTI) ratio. Lenders also consider your income and job stability.
Capital. What are your financial resources and net worth? Lenders look at assets, savings, and investments to assess your ability to make a down payment or to repay your loan if your income is interrupted.Collateral. This factors in your assets that can be used to secure a loan, such as a home or auto you plan to purchase with your loan.
Conditions. Lenders consider the conditions both within and outside your control—like economic conditions, federal interest rates and industry trends—before providing you with credit.
Real-Life Examples of a Borrower
People become borrowers for a lot of reasons, generally to purchase something they want or need. Some reasons are better than others.
For example, taking on a mortgage so you can purchase a house can be a great reason to become a borrower. Real estate often increases in value, a successful investment most people can't make without help from a loan.
Most people couldn’t afford to attend college without becoming borrowers. But student debt is a potentially positive reason to become a borrower—if used to complete a degree that substantially increases your future earnings.
Borrowing can become a problem when you aren't able to afford your payments. Missed payments can lead to fees, higher interest and credit damage.
If you've fallen behind, there are solutions for paying off your debt and resetting your finances.
Borrower FAQs
What is the difference between an original creditor and a credit card debt buyer?
The original creditor is the individual or company you borrow money from, like your bank or credit card company. Original creditors typically try to contact you for several months once you start missing payments. If unsuccessful, they may take you to court, send your account to a collection agency, or sell your account at a discount to a debt buyer.
Debt buyers purchase past-due accounts and get to keep whatever they can collect from you.
Collection agencies can be hired to collect past due accounts for original creditors, or they may function as debt buyers.
Is credit card debt bad?
Not necessarily. Occasionally carrying forward a smallish balance to get you through a rough patch or to indulge yourself is unlikely to do much harm. But if you find yourself carrying forward balances most or every month, you should understand that as a problem. Credit card debt is expensive compared to most other forms of borrowing. Investigate your options to get rid of your credit card debt, like a DIY debt payoff plan if you have the spare income, or debt relief programs if you’re struggling.
What is a high debt-to-income ratio?
It depends on the lender and the loan. For an unsecured personal loan, many lenders consider 40% high. But that’s not high at all for an FHA home loan. Here's a list of typical maximum DTIs for different types of loans:
Conforming mortgage: 36% to 45% depending on down payment and credit score
FHA home loan: Up to 57%, but most lenders set their limit lower
Unsecured personal loan: Up to 50%, depending on income and credit
Auto loan: 50% (with good credit, DTI doesn’t matter as much)
Almost all lending guidelines consider a DTI of 36% or lower to be safe.
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