What is a personal loan?
You can take out a personal loan for various purposes, then pay it back in monthly installments. Read more about how this kind of loan works.
Josh Richner
Borrowing generally comes with a cost
A creditor is any entity (a person or an organization) that lends money or extends credit to a borrower. The borrower then generally repays the debt with interest over time.
There are a few different types of 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.
Banks, credit unions and personal loan companies are “real creditors” that profit from lending. Personal creditors are family and friends; often, their loans come without the cost of interest.
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); unsecured loans don’t require collateral. Examples of secured loans include mortgages and auto loans. Personal loans and credit cards are typically unsecured.
Then there are personal creditors, which are individual lenders who 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 (i.e., without interest) — though 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 that the two parties have signed a loan contract outlining the agreement's terms.
This is one reason why real creditors typically require borrowers to sign a loan agreement before funds are issued; a loan agreement strengthens their ability to take legal action if the borrower defaults on the loan.
A creditor is a lender that offers loans to borrowers. A debtor is a borrower — the loan recipient. The creditor and the debtor generally have certain obligations, which should be 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 has an obligation to repay the loan under these terms. The loan agreement should also outline a creditor's actions if the debtor fails to repay the loan.
There are both 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.
Broken arrangements with no communication will result in action on the credit union’s part … no one wants this action to be taken.”
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,” she said.
Peters continued: “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. A reviewer on our site from North Carolina said about their experience with debt settlement: “As I pay in, they pay out and that worked very well for me. ... All the creditors were paid because I was paying in on time. We were able to get a loan to pay everything off right off the bat.”
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.
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