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Important in the world of lending and receiving credit is the role of the Creditor. In this wiki article, our readers will learn all about creditors: what they are, the different types of creditors, how bankruptcy affects creditors, and what credit scoring is.
Creditors in a nutshell
- Creditors provide credit to debtors, giving them permission to borrow money which will later be repaid
- There are several types of creditors
- Real creditors take the form of companies and financial institutions
- Personal creditors are friends and family
- Secured creditors conduct asset-based loans
- Unsecured creditors have no assets involved in the loan
- When a debtor is bankrupt and cannot repay their debt to a creditor, legal action is taken and assets are seized
- Creditors assess potential debtors by performing a credit check and determining the debtor’s credit score
What is a creditor?
In a transactional relationship, the creditor is the one providing credit. They are allowing permission for another party to borrow money which will be repaid in the future.
Creditors can take the form of institutions or persons. There are different types of creditors who perform their roles in specific ways.
Types of creditors
Real creditors take the form of banks or financial institutions. They can also be card issuers such as Mastercard or Visa who lend credit to their customers which must be repaid with interest at the end of the month.
Real creditors will usually have the most clearly laid out terms of repayment and will hold the debtors accountable for failing to meet these repayments, either through fines or bad credit ratings.
Usually friends or family, a personal creditor lends money on a less official basis than other creditor types. Often, the creditor and debtor will work out repayment terms together, with or without interest, on a schedule suited to the debtor. This differs from funding methods in which there is no expectation of repayment.
A type of creditor who is backed by collateral, secured creditors protect their lending terms with assets. These assets are pledged as a kind of security for the loan repayment by the debtor.
Secured creditors usually take the form of financial institutions, and their assets are anything the secured creditor wishes to have as collateral in case the debtor cannot repay the money. This type of transaction is sometimes called ‘asset-based lending’.
Lenders without collateral, unsecured creditors have none of the debtor’s assets to seize if the debt cannot be paid. Card issuers often enter into these agreements with debtors. They retaliate when the debtor defaults on their payments by affecting the debtor’s credit rating and increasing interest on future loans.
Creditors and bankruptcy
An important aspect of the creditor debtor relationship, debtors will sometimes file for bankruptcy when they are unable to repay debts. In this case, the creditor is notified by the court on the situation.
In the case of an asset-based loan, the debtor will have their non-essential assets repossessed in order to pay the debt. Unsecured loans will allow the debtor more opportunities to pay off their debt, rearranging payment plans or affecting the credit rating instead of collecting the debt.
Creditors and credit scoring
Important for creditors when deciding to lend credit to a debtor is determining that debtor’s credit score. They achieve this by performing a credit check. If the debtor scores highly, they are deemed a low risk for the creditor and will be given more favourable lending conditions, i.e. comfortable repayment plans, bigger loan sums, etc.
Information which the debtor gives to the creditor includes:
- Utility suppliers and bill history
- Other credit providers
- Landlords and mortgagers
- Mobile phone providers
The idea is to better understand the debtor’s financial history and reputation by examining their current financial relationships with other institutions. If they make their repayments on time with a variety of lenders, they are more reliable as a customer.