What Is a Creditor?

Creditor defined

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.

Real creditors

A real creditor is a financial institution, like a bank, credit union, credit card company, mortgage lender or personal loan company. A real creditor is an established organization that generates a large portion of its profit from extending loans or credit and charging interest and fees on that debt.

Real creditors tend to offer either secured or unsecured loans. Secured loans require collateral (an item of value the creditor can obtain should you fail to pay), while unsecured loans don’t require collateral. Examples of secured loans include mortgages and auto loans. Personal loans and credit cards, on the other hand, are typically unsecured.

Personal creditors

Personal creditors are individual lenders that extend loans to friends or family. They’re generally not a business seeking a profit; instead, they use their resources to help their loved ones when needed. These are often free loans that don’t come with interest, although some personal creditors may choose to charge interest.

A personal creditor may not have much legal recourse if the borrower defaults on the loan, depending on the applicable state laws, because many personal creditors don’t use written loan agreements. Some states honor verbal agreements, but others may require the two parties to sign a loan contract outlining the agreement's terms. However, like real creditors, some personal creditors may formally document their loans, which may be secured by collateral or unsecured.

Secured creditors

Secured creditors are real or personal creditors that require you to provide collateral for their loans. For example, secured lenders require you to pledge assets as collateral for the loan. These assets can include cash, stocks, cars or real estate. Secured creditors commonly offer:

• Mortgages
• HELOCs
• Home equity loans
• Auto loans
• Secured personal loans

When you offer assets as collateral for a loan, the secured creditor can use those assets to repay the loan if you don’t pay as agreed. Depending on the loan documentation and security agreement, your creditor might repossess or foreclose on the collateral and use the proceeds to repay some or all of your loan balance. If the collateral is cash held in a deposit account with your lender, your creditor may apply the money from your account to your loan balance.

Unsecured creditors

Unsecured creditors are also real or personal creditors, but they offer loans not backed by collateral. Some types of debt commonly offered by unsecured creditors include:

• Credit cards
• Unsecured personal loans
• Student loans
• Revolving lines of credit

If you don’t pay as agreed, unsecured creditors can turn your account over to collections or sue you for the amount you owe. Additionally, if a third-party guarantor or co-signer agrees to repay your debt if you don’t pay, the creditor might seek repayment from this third party.

What happens if you don’t pay a creditor?

If you don’t pay back your debt, you may face legal and financial consequences, 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, you have 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, creditors may be violating UDAAP if they fail 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 (CFPB).

» INTERESTED? What is predatory lending?