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What Is A Creditor?

A creditor is an individual or financial institution that lends credit or funds to another individual or institution.

Deeper Definition 

A creditor is a term frequently used in the financial world to describe a person, organization, or government to whom a borrower owes money. Creditors loan out their money to another entity to get it back in the future with interest.

A creditor could be someone you know personally, such as a friend or a family member. In such cases, they are known as “personal creditors.” On the other hand, if the entity providing the loan is a financial institution, such as a bank or credit card issuer, they are known as “real creditors.”

Creditors make money by charging interest on the loans they offer. Usually, it is a percentage of the loan amount. For instance, a creditor lends a borrower $1,000 to be repaid within 30 days with a 10% interest rate. When the borrower is to pay the loan, they will pay $1,100. The $100 is the creditors’ profit. Besides collecting interest on loans, creditors way also make money by charging a late repayment fee. Typically, before a creditor gives a loan to a borrower, there would be an agreement between both parties regarding the loan terms. The terms would include details such as the loan duration, interest rate, and penalty for late payment.

Broadly, there are two categories of creditors:

  • Secured creditor: This type of creditor offers loans and holds the borrower’s assets as collateral. If a borrower defaults on the loan, the creditor can seize the collateral and sell it to recoup its losses.
  • Unsecured creditor: This type of creditor offers loans without holding the borrower’s asset as collateral. If a borrower defaults on the loan, the creditor would require permission from a judge to sell the borrower’s assets to recoup its losses.

Creditor Example

Michael takes a $200,000 mortgage loan from Crystal Bank to finance the purchase of his dream home. The mortgage term is 15-years with a fixed interest rate of 3.5%. The creditor in this instance is Crystal Bank, while Michael is the debtor. A debtor is an individual or institution that owes a creditor money.

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