Article bySusmita Pathak
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Creditor Meaning

A creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties.

DebtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more running out of funds can receive credit immediately without the obligation of paying it back instantly. The amount lent to the borrower may be subject to an interest rate, depending on its size and the lender. A creditor takes various measures to secure the loan amount if the debtor turns defaulter, like requiring collateral and placing liens on it.

Key Takeaways


The history of lenders can be traced back to ages when people used only gold and other metals as the only means of credit. From metals in ancient times to cryptocurrenciesCryptocurrenciesCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party more today, the form of money has changed.

The answer to what is a creditor – is that it is an entity that lends money or extends credit to the debtor for buying goods, properties, and services without having to pay for them immediately. Instead, the customers can have their monthly payments done at once as per the amount they owe. Lenders can be:

  1. Personal – Someone from the family or friends from whom one borrows money.
  2. Real – An individual or institution that lends money under strict repayment conditions and repossesses collateral if the loan remains paid. Because of the risks associated with lending, it can be secured and unsecured.

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How Do Creditors Make Money?

There are a few things that secured lenders are very particular about, such as interest rate. They levy it on borrowers and keep making money from it till the loan repaymentLoan RepaymentA loan repayment calculator helps in determining the amount of each installment payable by the borrower on taking a certain amount as a loan at a specific interest rate to be repaid in periodic installments for a particular more. However, it can vary depending on the amount lent and the lender.

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Multiple factors determine the credit interest rate, such as:

  1. Creditworthiness: Lenders offer debtors a loan only if they find them worthy enough to repay it. Before deciding the interest rate, they assess their creditworthiness based on their income and other financial liabilitiesFinancial LiabilitiesFinancial Liabilities for business are like credit cards for an individual. In simple terms, a financial liability is a contractual obligation that needs to be settled in cash or any other financial asset and are very useful in the sense that the company can employ “others’ money” in order to finance its own business-related activities for some time period which lasts only when the liability becomes due. The liabilities could be of two types, short term and long more.
  2. Credit Scores: Financial institutions use credit scores to know if a particular loan seeker is a low-risk debtor or high-risk debtor. For the loan applicants who appear high-risk to lenders, the interest rate charged is considerably more than their low-risk counterparts.

Creditors Examples

Credit can be offered for several purposes, given different types of lenders. A debtor can seek loans for mortgage, education, automobile, purchasing goods and services, etc. Here are a few examples to better understand the process:

What Happens When Creditors Don’t Repay?

While personal lenders do not impose any strict repayment terms on debtors, real ones do. The latter can be categorized in to secured and unsecured. The repayment terms for debtors are always applicable, regardless of the type of lender.

  • Secured Creditor always makes sure they get their borrowed amount, such as a mortgage, back at the specified time. They secure the amount against an asset termed collateral, which they seize to cover the losses from the unpaid loan.
  • Unsecured Creditors trust the borrowers based on the signed contracts, the terms of which are mutually agreed on by the parties involved. With that said, they can claim a part of the assets in case the debtors go bankrupt.

Personal lenders might use the non-repaid amount as a short-term capital gains loss for income tax benefit. However, to make sure they convert their loss into a tax gain, they need to reclaim the debts as proof of non-repayment despite multiple reminders.

If the debt remains unpaid and lenders move to the court of law, the legal authority can take relevant actions to make sure they get their lent amount back. Typically, the process goes through four stages, including the complaint filed by the lender, review of the debt by the borrower, hearing in the civil court, and the court verdict.

The US Treasury can garnish lenders’ social security benefits in the event of defaults. Whether it is retirement, disability, or any other kind of benefits, debtors are likely to lose out on the same if their debt remains unpaid.

Creditors In Accounting 

In accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial more, creditors are people or organizations like banks and credit unions that offer products and services to the other party without asking them to pay back for it instantly. The term is also found synonymous with the word “supplier” or “vendor”.

For example – when a wholesaler sells the products to a retailer on credit, it becomes the lender, whereas the latter acts as a debtor. Here, the payment does not intend to be made immediately after the purchase. Instead, the debtor can pay for the goods and services at once as a whole.

Similarly, when the same retailer sells those goods and services directly to a consumer on credit, it becomes a lender, and the consumer acts as a debtor. In both cases, the debtor can have their sheet maintained on a quarterly or monthly basis, according to which they can pay at the end of the specified period. 

Frequently Asked Questions (FAQs)

Who is the creditor?

A creditor is an individual, institution, or government that extends credit or lends money to another party, given an agreed-upon on-time repayment assurance.

What is the difference between creditors and debtors?

Creditors lend money to people or organizations immediately with the guarantee of getting it back at a specified time. Debtors receive the money instantly with the obligation of paying it back in the given time frame.

This has been a guide to What is a Creditor & its Meaning. Here we discuss types of creditors and how does it work along with examples. You may also have a look at the following articles to learn more –

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