A creditor is simply a person or company to which money is owed. Common creditors include banks, credit card companies, and other financial institutions. 


What Is A Creditor?

If you want to borrow money, you will meet a creditor—an individual or business who will lend you money in the form of credit. Here are the most important things about the terminology and the role of a creditor in the loan process.

A creditor is the person or entity to whom money is owed. Typically, there are two types of creditors: personal and real. Personal creditors are family members or friends willing to lend you the needed money. Such a transaction rarely requires any legal procedure and normally involves only a personal agreement.

Personal creditors are often relatives, and real creditors are official institutions, such as a bank or a credit union that may offer you a loan. The difference is that working with real creditors comes with interest charges for the loan.

A loan is a precise, legal, and fixed agreement between a borrower and a lender (debtor and creditor). Its main characteristic is that everything is clearly defined. The interest is the percentage of your loan you will pay to the creditor to get the cash you need.

How Does the Borrowing Process Work with Personal Creditors?

If you’re borrowing money from a relative or a close friend, then the process is simple. You can ask them for money, and they will give it to you if they want to. You won’t likely be paying any interest for this loan.

Even though most people consider this option to be friendly, it would still be smart to make a personal agreement. Such a deal does not have to be taken to a notary; but it should be signed by both parties.

How Does the Borrowing Process Work with a Real Creditor?

For a bank, lending money is a way of making money. How do banks profit by lending money? One way that real creditors (financial institutions) earn their money is by charging interest on your loan.

The interest depends primarily on your credit score. If your credit score is higher, your interest rate may be lower, as a good credit score shows creditworthiness. If your credit score is lower, your interest rate may be higher. If you have an exceptional credit score, lenders will consider you trustworthy, and if your credit score is not the best, try working on it before taking out the loan.

When borrowing from banks (real creditors), there are two types of credit: secured and unsecured.

Creditors need assurance that they will not lose their money if you cannot repay. For this, creditors often ask for a pledge. This assurance is most commonly a collateral item or a trustee. This type of credit is called a secured loan. Secured loans typically come with a lower interest rate, and secured loans are considered less risky because they come with collateral.

The other type of loan that creditors might issue is an unsecured loan. An unsecured loan doesn’t include any collateral or assurance, and because of this, they may come with higher interest rates.

Your credit score is one way that lenders determine your creditworthiness. Factors such as your previous loans, previous repayments, potential bankruptcy, income, and so on influence your credit score. The better and more respectful of a client you are, the better your score will be. Hence, you may get added benefits from the lender.

Collateral is an item of value offered to the lender that can be repossessed in case of default. The loan’s principal is usually formulated with the property’s value in mind.

What Happens If the Borrower Cannot Repay the Loan?

If the borrower cannot repay what is owed, the lender may send a warning to alert them of their debt.

If the loan was secured, the financial institution would consider starting a repossession process, which means that the lender will again send you a warning to alert you of your debt. After that, the lender will begin the process of claiming the collateral. 

If you agree to this, the procedure will be short and relatively quick. If you do not agree to give up the collateral, the case may be taken to court. If you had a trustee as the assurance to the credit, then all the responsibilities will be transferred to them.

In contrast, if the loan was unsecured, you might experience other problems.

Depending on the facts regarding your case, the court has three options. The court can give you extra time to repay the debt, freeze everything until you are ready to continue regular payments, or simply force you to pay the debt.

Another option is an attempt to collect the debt. This can either mean that the lender attempts to collect the debt themselves or they sell the debt to a collection agency. An independent collection agency is a firm specialized in collecting debts. 

Do the Terms “Lender” and “Creditor” Mean the Same Thing?

Lender and creditor are often referred to as being identical, and in most cases, they are. However, there is a slight difference between the two. A lender is a party who lends the money, while a creditor is a party to whom borrowed money is owed. 

In most cases, the lender and the creditor are the same. However, the original lender can sell the debt to another institution. Here, the borrower will repay the same debt but to another party.

If you borrow money, you will become what’s known as a “debtor.” However, there is a difference between a debtor and an issuer. If the debt is in the form of a loan from a financial institution, the debtor is called the “borrower.” If the debt is in the form of securities, such as bonds, you may refer to the debtor as an “issuer.”

One important thing is that debtors who do not manage to repay their debts cannot go to jail under US law. Debtors may be taken to court or receive a lowered credit score. To get more specific information about the potential consequences of not repaying debt, check out the Fair Debt Collection Practices Act (FDCPA). The FDCPA is an act created to protect debtors and define their obligations. The document is something anyone in the US thinking about taking out a loan may want to read.

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