What is a creditor?

Creditors lend money to you, the borrower, typically for a fee

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Shaking hands with money

Creditors are people or companies that lend money or extend credit to borrowers (consumers and businesses). Any financial lender is considered a creditor. Some of the common types of consumer debt offered by creditors include mortgages, credit cards, student loans, auto loans and personal loans. The reality is that many Americans rely on debt – and therefore work with creditors on a regular basis. Lending is a vital industry, and it’s important that you know how it works.

Key insights

Creditors usually make money by charging interest and fees on loans.

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Debtors may have a legal obligation to repay borrowed funds.

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Creditors can pursue legal action if debtors fail to repay their loans.

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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.

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 range from cash, stocks, cars and 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

The recourse options unsecured creditors can take if you don’t pay as agreed are to 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?

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.

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. ”
— Carma Peters, president and CEO of Michigan Legacy Credit Union

» 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?

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Can you settle with creditors?

Yes, you may be able to settle your debt with your creditor. How willing your creditor is to settle your debt often depends on what collateral backs the loan and if the loan is supported by a guarantee (a promise by the government, person or company to repay if you don’t).

Creditors are more likely to settle unsecured debt since there isn’t another source of repayment they can go after, such as foreclosing on your home or asking the guarantor to repay the loan.

Do creditors ever forgive debt?

Yes, creditors sometimes forgive debt. That said, it’s unlikely your creditor will forgive all your debt unless it’s part of a loan forgiveness program like the federal student loan forgiveness programs. Even so, some unsecured creditors may be willing to forgive a portion of your debt if you agree to repay the rest via a settlement agreement.

While you may be able to negotiate a settlement with your creditor on your own, debt settlement companies can also help you do this for a (significant) fee, often 15% to 25% of your original debt balance.

What is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (FDCPA) is a federal law designed to protect consumers from debt collection companies that use unfair, deceptive or abusive practices when trying to collect a debt.

This law is in addition to any debt collection laws that exist at the state level. It applies to third-party debt collectors, collection agencies and lawyers who collect debt; it usually doesn’t apply to the original creditor that originated the debt.

Should I pay the original creditor or debt collector?

If your account has not been sold to a debt collector, you should pay the original creditor. If your original creditor has sold your debt to a debt collector, you should pay the debt collector.

When attempting to collect the debt, debt collectors are required to allow you to dispute the debt and share such things as the original creditor's name and the amount owed with you. If the debt collector doesn’t do these things, you can file a complaint with the Federal Trade Commission, your state’s attorney general or the CFPB.

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.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Consumer Financial Protection Bureau, "Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) examination procedures." Accessed April 20, 2023.
  2. Consumer Financial Protection Bureau, "What information does a debt collector have to give me about a debt they’re trying to collect from me?" Accessed April 20, 2023.
  3. Consumer Financial Protection Bureau, “What laws limit what debt collectors can say or do?” Accessed April 20, 2023.
  4. Federal Deposit Insurance Corporation, “Unfair, Deceptive, Or Abusive Acts Or Practices.” Accessed April 20, 2023.
  5. Federal Reserve Bank of New York, "Center for Microeconomic Data." Accessed April 20, 2023.
  6. Federal Student Aid, "Student Loan Forgiveness." Accessed April 20, 2023.
  7. Federal Trade Commission, "Debt Collection FAQs." Accessed April 21, 2023.
  8. Federal Trade Commission, “Fair Debt Collection Practices Act.” Accessed April 20, 2023.
  9. Federal Trade Commission, “Think your company’s not covered by the FDCPA? You may want to think again.” Accessed April 20, 2023.
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