A creditor can either be a person or an institution that provides credit to an entity such as a corporation or an individual, thus permitting a loan that should be repaid in the future. This can also be a business entity that offers supplies or renders services without requiring immediate payment.
Creditors can be classified as either real or personal. Individuals who lend money to family and friends are known as personal creditors. While on the other hand, banks and finance companies are called real creditors since legal contracts are involved. These sometimes may even include granting the lender the right to claim any of the borrower’s real assets in the event of a default.
How Do Creditors Earn Money?
It is known that creditors usually make money through charging interests. For instance, a creditor grants you $ 6,000 with a 5 percent interest rate. This means that you are required to repay the loan amount plus the interest rate at a certain time. Interests are only reasonable because creditors take a particular amount of risk to lend money to borrowers who might fail to repay. Therefore, as a form of mitigation, most creditors index their fees and interest rates to the debtor’s past credit history and creditworthiness.
So by being a responsible borrower, you can actually save a substantial sum of money, especially if you are applying for a huge loan such as a mortgage. The interest rates for mortgages may vary based on a lot of factors such as the amount of down payment made and the lender itself. For that reason, your creditworthiness has a huge impact on your interest rate.
If you are considered a low-risk borrower because of your great credit scores, creditors may reward you with a lower interest rate. However, if you have a low credit score, credit companies and banks might charge you with higher interest rates.
What Happens When Creditors Are Not Repaid?
Creditors have various options when debtors fail to make payments. As a personal creditor, you can possibly recoup a debt by claiming it as short-term capital gains/loss on the borrower’s ITR or income tax return. But in order to do this, you have to take a significant amount of effort. As a real creditor, however, you can repossess the assets used as a collateral such as houses and cars. Furthermore, you can take borrowers to court for unsecured debts.