A creditor is that person or institution that provides credit by giving another the chance to borrow money that will be repaid in the future. Alternatively, a business who provides supplies or services to a customer without immediate demand of payment is also considered a creditor. This is based on the fact that a client owes the entity money for services or products already enjoyed.
There are two fundamental types of creditors, and they can be classified as either personal or real. Personal creditors are people who loan money to family and friends. While Real creditors such as microfinance banks or any other financial institutions have a contractual agreement with the borrower, this arrangement gives the lender the right to claim any of the debtor’s genuine assets if they cannot pay back the loan.
Different Forms of Creditors
In general terms, a creditor is synonymous to a supplier. A creditor could be a person, organisation or any other entity that sells products or services. This means that all wholesalers and retailers could be creditors because they are into selling their products or services.
Another example of a creditor relationship is if you take out a loan to buy your house. Then the bank who holds your mortgage is the creditor. As such, if a person or entity has given out money as a form of a loan, then they are a creditor.
Usually, anyone could be a creditor depending on the kind of transaction that triggered the lender and borrower relationship. Each creditor has a stipulated agreement with their borrowers about the terms and conditions of the loan contract.
How Do Creditors Make Money
With the prevalence of creditors nowadays, you may wonder how lending companies make money. Creditors make money by charging interest on the loans they offer their clients. For example, if a borrower receives a loan for the sum of N5,000 with 10% interest rate, the lender makes money due to interest on the loan. In return, the creditor faces a risk that the borrower may not be able to repay the loan. To reduce risk, most creditors factor their interest rates or fees into the borrower’s credit score and past credit history. As a result, being a responsible borrower is essential and could save you a deal of trouble getting a loan, particularly if you are taking out a jumbo loan.
Borrowers with quality credit scores are considered low-risk to potential creditors, and as a result, these borrowers are rewarded with low-interest rates. In contrast, creditors consider borrowers with weak credit scores as high risk, and to mitigate the risk, they are charged with higher interest rates.
What Happens When The Borrower Defaults?
The creditors are often posed with the challenge of repayment when granting loans. If a borrower does not make repayments as at when due, the creditor has a few varieties of options. Personal creditors who cannot recover a debt may be able to claim it as gain on their income tax return. This incentive can only be effected after they must have attempted to recover the debt. Creditors such as banks can take over collateral used to secure the loan such as homes and cars. They also have the option of taking loan defaulters to court over unsecured debts or engage a third-party to buy or recover the debts on their behalf.
However, if a borrower declares himself bankrupt, the court duly notifies the creditor of the proceedings. Sometimes, the borrower’s assets are sold to recover the debts and paid in order of their priority. Unsecured loans such as online loans are given the least priority, giving those creditors the smallest chance of recovering their funds from borrowers during bankruptcy proceedings.