Creditor

Creditor summary:

• Creditors are entities or people that extend credit, generally as either a loan or a line of credit, to a borrower.

• Creditors normally charge borrowers interest, which is a fee for owing money.

• Mortgage lenders, auto lenders, and credit card companies are all examples of creditors.

Creditor Definition and Meaning

A creditor is an entity or person that extends credit to another party, with the expectation of being repaid later. Credit is normally in the form of either a loan, or a line of credit that the borrower can use up to a predetermined limit.

When you have a loan, credit card, or a line of credit, you make payments to the creditor. If you lend money to another person, then you’re the creditor.

Key Aspects of Creditors

Whenever one party owes money to another, there’s a borrower (also known as a debtor) and a creditor. The creditor is the party that’s owed the money.

Creditors usually charge interest (typically as a percentage of the amount owed). Interest is the fee for owing money. Interest is one way the creditor makes a profit from lending money. 

When you borrow money, the amount of interest you pay depends on the interest rate. The interest rate is based on several factors, which can include:

• The type of loan or line of credit

• Your credit score

• Economic conditions

The contract between the creditor and borrower explains the terms of repayment. Monthly billing is most common, where the borrower receives a bill and must make a payment to the creditor every month. Check your contract to be sure, because some creditors have other payment schedules.

Types of Creditors

Here are the most common types of creditors:

• Real creditors are banks and other financial institutions. They set up legal contracts with borrowers that cover the terms of repayment.

• Personal creditors are individuals. They lend money to friends and family, often without a contract in place.

• Secured creditors require collateral from the borrower. The collateral is something valuable that guarantees the loan. If you don’t repay the loan, the creditor can sell the collateral to recover the money you owe.   

• Unsecured creditors don’t require collateral from the borrower. The borrower provides a personal guarantee to pay back the money, but doesn’t put up any property as collateral.

Real-Life Examples of Creditors

Any company that lends money is a creditor. Here are a few real-life examples:

• Mortgage lenders: Mortgage lenders issue home loans, and since the home is collateral on the loan, mortgage lenders are secured creditors.

• Auto lenders: Auto lenders issue loans used to purchase cars, and they’re another example of a secured creditor. The car is the collateral on the loan.

• Credit card companies: Credit cards are a flexible form of credit that you can use and reuse as you pay back what you borrow. Credit card issuers could be secured or unsecured creditors. But most credit cards are a form of unsecured debt and don’t have any collateral attached.

Many creditors offer multiple forms of credit. For example, a bank may offer mortgages, home equity lines of credit (HELOCs), auto loans, credit cards, and potentially other types of credit, too.