What is a creditor?

Creditor definition

A creditor is any entity (a person or an organization) that offers financing to a borrower. The borrower then generally repays the debt with interest over time.

Examples of creditors you commonly use include mortgage companies, credit card companies, banks, hospitals, and any other company that you do not have to pay immediately when you receive a service or an item,” said Kendall Meade, a financial planner with SoFi.

With most creditors, you’ll apply for financing before credit is extended. This process entails submitting an application that provides personal and financing details, as well as giving permission for a credit check. The creditor then evaluates your application to determine if you meet its credit standards and any other requirements (e.g., equity in your car or home).

You’ll sign loan documents before getting funded once your financing is approved. With installment loans, you’ll receive one lump-sum payment and pay it back over a set period. Conversely, with revolving debt such as credit cards, you can borrow the funds and pay them back repeatedly.

» LEARN MORE: What is credit and how does it work?

Creditor vs. debtor

Creditors and debtors need each other to make the loan borrowing process work. Here’s a breakdown of the differences:

• A creditor is a lender that offers loans to borrowers.
• A debtor is the borrower or loan recipient.

The creditor and the debtor generally have certain obligations, which are described in detail in the loan agreement or contract. For example, creditors may offer loans with certain terms, like a specified interest rate and repayment date. The debtor must repay the loan under these terms. The loan agreement should also outline a creditor's actions if the debtor fails to repay the loan.

Types of creditors

Different types of lenders fall into different creditor categories. Some of the most common types of creditors include real creditors, personal creditors, secured creditors and unsecured creditors. Here’s a full overview of each type of creditor.

What happens if you don’t pay a creditor?

There are legal and financial consequences for borrowers who don’t pay back their debt, at least when dealing with provable loan agreements. Creditors’ actions can vary depending on the type of loan and your state’s laws.

The loan agreement should define these consequences (charging a late payment fee or repossessing a vehicle, for instance). The creditor may also report missed payments to credit bureaus, which could result in a significant credit score drop.

Creditors’ actions can vary depending on the type of loan and your state’s laws.

According to Carma Peters, president and CEO of Michigan Legacy Credit Union, a creditor may begin contacting debtors in default as soon as their payments are 10 days late “so [lenders] can find options to avoid any late payments on their credit report. The earlier members call, the more options that are available.”

Peters continued, explaining: “Our staff will ask for payment arrangements – it is important members keep those arrangements to avoid further action. Broken arrangements with no communication will result in action on the credit union’s part. This can be repossession or a court default judgment – no one wants this action to be taken.”

If you do have difficulties repaying your lender, there are debt relief options, including debt consolidation loans and debt settlement.

» MORE: What is debt collection and how does it work?

Actions creditors are not allowed to take

The specific actions original creditors can and cannot take when attempting to collect a debt from consumers vary by state. Creditors are also prohibited at the federal level from engaging in unfair, deceptive or abusive acts and practices (UDAAP) when attempting to collect consumer debt related to any financial product or service.

For example, a creditor may be engaging in a deceptive act or practice if it makes misleading claims or omits material details about your loan (e.g., you’re not told about the types of fees you might need to pay or when you’ll be charged the fees).

Additionally, a creditor may be violating UDAAP if it fails to let you know they’re calling about a debt collection or if they call you repeatedly in a way intended to annoy, abuse or harass you.

If you believe your creditor has engaged in unfair, deceptive or abusive acts or practices, you can file a complaint with the Consumer Financial Protection Bureau.

» MORE: What is predatory lending?

Bottom line

A creditor lends money to a debtor, who has an obligation to repay those funds. Creditors make money when debtors repay their loans with interest and fees. When debtors fail to repay their loans, creditors can take action to recoup their financial loss. Often, these actions are expensive and time-consuming for both the creditor and the debtor.

To avoid going delinquent on a loan, prioritize making on-time payments and contact your creditor promptly if you encounter a financial hardship that may delay or alter your repayment. You may also consider working with a credit counselor to manage your debt.