What is a Creditor?

Published by Thomas Herold in Banking, Economics, Real Estate

'Creditor' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Creditors are those financial institutions or individuals who extend credit to a business or other individual. They carry this out by providing financing which they expect will be paid back at a set time in the future. There is another type of creditor as well. This is a company which delivers services or supplies to a person or other business yet does not insist on immediate payment. Since the customer actually does owe the company money for the goods or services provided in advance of payment, that company becomes their creditor de facto.

Within the universe of a creditor there are real and personal categories of them. Finance companies and banks represent real creditor situations. This is because they possess official and legally binding contracts which they sign with the borrower. In this action, they bind assets of the borrower as collateral against the loan in many cases. Typical collateral would be the underlying asset for which the borrower is obtaining credit in the first place. This is often a car, a house, or some other piece of Real Estate. A personal creditor is a family member of friend choosing to loan out money to their loved one or friend.

Real creditors do not loan out money out of the goodness of their hearts. Instead, they intend to earn profits by charging the borrowers interest for these loans. Looking at an example helps to clarify the concept. A creditor might loan out $10,000 to a borrower at a six percent rate of interest. The lending institution will realize earnings in the form of loan interest.

For this accommodation, the creditor is taking on some amount of risk that the borrowing business or individual might potentially default on the loan. This is why the majority of those extending credit will price the interest rate which they charge the borrower based on the business or persons’ prior credit history and creditworthiness. It becomes important to borrowers of especially large amounts of money to have high credit quality so that they are able to obtain a more advantageous interest rate and save money on the interest payments.

The rates of interest on mortgages depend heavily on a host of different variables. Some of these are the nature of the lender, the credit history of the borrower, and the amount of the upfront down payment. Still, it is usually the creditworthiness that overwhelmingly determines the final interest rate which becomes applied to a loan such as a mortgage. This is because those borrowers who boast fantastic credit histories and scores come across as low risk for the creditor in question. It is why they enjoy the lowest of interest rates. As lower credit score-carrying borrowers prove to be considerably riskier for the creditors, they manage their risk by requiring a greater rate of interest in compensation.

There are cases where a creditor will not obtain repayment. In such cases, they do have several options. Banks and official real credit issuing entities are allowed to repossess the underlying collateral. This would mean they have the ability to seize either the car or home which secured the loan. Where unsecured debts are concerned, it is more difficult to collect. They might sue the borrower for the unpaid debts in these cases. Courts could choose to issue orders attempting to force the borrower to pay them back. They might do this by seizing assets in their bank accounts or by garnishing their wages with their employers.

Sometimes the borrowers will choose to file for bankruptcy. In these cases, the courts will be the ones to alert the creditor to the situation. There are cases where any non- necessary assets can be liquidated so that debts can be paid back. The order of priority will make unsecured creditors last in the receiving line.

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The term 'Creditor' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.