What is a creditor?

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In a Nutshell

The term creditor typically refers to a financial institution or person who is owed money, though its exact definition can change depending on the situation. For example, if you have an outstanding balance on a loan, then you have a creditor.
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If you’ve ever made a payment on a car loan, credit card bill or utility bill, then you may be more familiar with a creditor than you think.

At first glance, you may be inclined to think of a creditor as only a bank or credit card company, but a creditor can be anyone that you owe an outstanding balance to.

What is a creditor?

The term creditor can mean different things depending on the situation, but it typically means a financial institution or person who is owed money.

If you’re the person who owes the money to a creditor, you may be referred to as a debtor or borrower.

Once a borrower and lender agree on terms for financing and sign a loan agreement, they’re entering into a contract. That contract often specifies the repayment agreement terms of the loan and the expected payment amounts.

You may hear the terms lender and creditor used interchangeably. The same goes for borrower and debtor. But you’ll more likely hear creditor and debtor used during legal proceedings where a creditor is trying to collect on an outstanding balance, such as during a bankruptcy case.

Ultimately, if a debtor can’t repay the funds borrowed, the creditor typically has the right to attempt recovery of what is owed, which is when repossession, foreclosure and debt collectors can come into play.

Examples of common creditors

There are several types of creditors, such as real creditors, personal creditors, secured creditors and unsecured creditors.

Real creditors: A real creditor is a financial institution, such as a bank or credit card issuer, that has a right to be repaid.

Personal creditors: These are friends or family you owe money.

Secured creditors: These lenders have a legal right — often through a lien — to property you used as collateral to secure the loan.

Unsecured creditors: A credit card issuer is a good example of this type of creditor. You may owe money, but it’s unsecured debt, meaning you haven’t agreed to give the creditor any property — such as a car or home — as collateral to secure your debt.

Examples of common debts

  • Mortgage: A mortgage is a loan you take out from a financial institution to purchase a house. In this case, the creditor would be the financial institution that provides the borrower with the mortgage loan.
  • Auto loans: Similar to a mortgage, an auto loan is a loan that someone takes out in order to purchase a vehicle.
  • Student loans: Students who cannot afford the cost of tuition on their own can apply for financial aid, including student loans to cover expenses such as tuition, housing and books. When the time comes to repay the student loan, payments are made to the creditor.
  • Credit cards: Credit cards offer a revolving credit line with a specified credit limit. The credit card issuer that extended the credit line could be the creditor if you have an outstanding balance.
  • Personal loans: A personal loan is a loan — often unsecured — that can help you pay for a big project like home improvements or to consolidate debt. If you have an outstanding balance on the personal loan, the creditor is likely the lender that issued the loan.

How creditors make money

One way creditors can make money is by charging interest on the credit they extend. A creditor can often make money through fees, like late payment fees, which may be applied if a payment is received after the agreed-upon due date.

The creditor may be taking a risk when extending credit to an approved borrower. If a debt can’t be repaid, the creditor may have no recourse other than to make a legal claim in court or to hire a debt collection agency to try to recover the money.

Depending on the terms of the agreement, the creditor may be able to repossess an asset used as collateral (like a car), garnish a debtor’s wages, or try to get at least partial payment from the debtor through a court order if the debtor is unable to repay as agreed.

What’s next

A creditor is essentially a person or financial institution you owe money to. If you owe money, you may be referred to as a debtor.

If you ever come across these terms, make sure to read the fine print to understand how they are being used. Having a general definition can hopefully help you cut through some of the jargon to better understand some of the financial advice that comes with applying for credit.

About the author: Sarah Schaut is a Canadian living in sunny Florida. She’s an economic crimes detective at a city police department and an expert in credit, fraud and mortgages. Read more.