What is a Creditor?

Creditors are entities that provide some form of credit to a debtor or borrower. A creditor can be an individual, a credit card issuer, a bank, or even a corporation. In most situations where a creditor extends services to a debtor, there is the expectation of some type of recompense to be delivered according to terms and conditions agreed upon by the two parties.

There are many different examples of how creditors work. For example, some will only lend money or extended credit card privileges if there is some type of property or asset offered by the borrower. Generally known as secured credit, this approach helps to decrease the risk to the individual or entity that is extending the loan or credit, since there is always the option of laying claim to the pledged asset in the event that the borrower defaults on the agreement.

Other creditors choose to not require the pledging of some type of asset in exchange for extending a loan or credit to a borrower. This approach is normally referred to as unsecured credit. In this scenario, the creditor has enough information to indicate there is an acceptable amount of certainty that the debtor will repay the full amount of the debt in a timely manner. Many credit cards are issued on this premise, as well as some personal loans.

In most cases, the debtor and creditor both commit to a contractual agreement in order to establish the lending relationship. A typical contract will include provisions that clearly spell out the responsibilities and rights of both parties, in regard to the business deal. This includes the terms of repayment that the borrower agrees to, the amount of interest that the lender is allowed to charge on the outstanding balance, and the types of ancillary fees and charges that are bundled into the total amount due over the life of the contract. Creating a document of this type is to the benefit of both the debtor and the creditor, since the terms and conditions contained in the contract define what each party can do in the event that the other party fails to honor the basics of the agreement.

Various creditors choose to focus on specific types of lending activity. Some prefer to provide mortgages to individuals and companies. Others focus their attention on creating and offering credit card deals to qualified candidates. Still others address the market of short-term loans, including personal loans obtained from a bank, as well as payday loans that are usually due within two to four weeks. In most countries, regulatory agencies structure specific rules and standards that lenders must follow in order to offer their services to potential creditors.