What’s the Difference Between a Debtor and a Creditor?

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In every credit relationship, there's a debtor and a creditor: The debtor is the borrower and the creditor is the lender. Your own obligations differ depending on which role you play. Here's what you need to know about the relationship between these two terms, and how to make sure you're doing your part.

What Is a Debtor?

A debtor is someone who borrows money. Other terms for this role include borrower, debt holder, lessee, mortgagor and customer. Debtors can be individuals, small businesses, large companies or other entities.

Once they're approved for a loan, a debtor typically receives a lump sum payment, which they'll pay back over time based on the terms of the loan. In the case of a credit card or line of credit, a debtor receives a revolving credit line, which they can use and pay off over and over, according to the terms of the card or credit line agreement.

In addition to the principal amount borrowed, debtors may also be required to pay interest on their principal balance.

What Is a Creditor?

Opposite of the debtor in a credit relationship is the creditor. Other terms for creditor include lender, lessor and mortgagee.

In most cases, creditors are banks, credit unions and other lending institutions. But they can also be individuals, nonprofit organizations, trade vendors or other entities.

Creditors typically have underwriting processes that determine which debtors are eligible for a loan, credit card or line of credit. They also determine the terms of the credit relationship, including interest rate, any fees and loan term, which the debtor can accept or reject.

Over the course of the repayment period, creditors collect payments from debtors, and they often report information about those payments with credit reporting agencies. If the debtor fails to pay on time, the creditor may report that, too, which can damage the debtor's credit score.

What Is the Difference Between Debtors and Creditors?

There are no debtors without creditors and vice versa. But the difference between the two is simple: It's all based on who's borrowing and who's lending.

For example, if you're taking out a mortgage to buy a home, you're the debtor and the mortgage company is the creditor. During the application process, the creditor will review your credit history, financial situation and the home you're hoping to purchase to determine whether you qualify for the loan.

If you're approved, the creditor pays the seller of the home and reduces the loan balance based on the loan's interest rate, repayment term and other loan terms. During this time, the creditor retains the deed to the home. You'll then make payments based on the agreement until you pay the loan in full, refinance the debt or sell the home.

If you pay the loan in full, you'll receive the deed and own the property outright. If you refinance the debt, your new creditor will pay off the original loan, and the original creditor will transfer the deed to the new one. If you sell the home, the buyer will pay off your loan with cash or a loan of their own, at which point your creditor will transfer the deed to the buyer or their creditor.

The Bottom Line

As a consumer, you'll likely act as a debtor in most of your credit relationships, though you may act as a creditor if you lend money to a friend or family member or invest in peer-to-peer lending.

If you're planning to borrow money, it's important to build and maintain a good credit score and also monitor your credit regularly to maximize your chances of getting approved for affordable financing.

It's also a good idea to avoid borrowing too much or borrowing in situations where it might negatively affect your budget and financial plan.

If you're considering lending money to someone else, whether it's someone you know or a stranger, think carefully about their ability and willingness to repay the debt. Keep in mind that it might impact your financial situation if someone who owes you money defaults on their end of the agreement.

In either case, take your time to review the terms of the credit relationship to determine if it's the right money move for you.

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