A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract ) that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower . The first party is called the creditor, which is the lender of property, service, or money.
39-439: Creditors can be broadly divided into two categories: secured and unsecured . The term creditor is frequently used in the financial world, especially in reference to short-term loans , long-term bonds , and mortgage loans . In law, a person who has a money judgment entered in their favor by a court is called a judgment creditor . The term creditor derives from the notion of credit . Also, in modern America, credit refers to
78-408: A deficiency judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt , which is not connected to any specific piece of property. Instead, the creditor may satisfy the debt only against the borrower, rather than the borrower's collateral and the borrower. Generally speaking, secured debt may attract lower interest rates than unsecured debt because of
117-414: A non-purchase money security interest (NPMSI) loan, where the creditor takes a security interest in items that the debtor already owns. Loan In finance , a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt (e.g.,
156-430: A promissory note ) will normally specify, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. A loan entails the reallocation of the subject asset (s) for a period of time, between the lender and the borrower . The interest provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions
195-438: A rating which indicates the likelihood a borrower will pay back their loan . In earlier times, credit also referred to reputation or trustworthiness . In accounting presentation, creditors are to be broken down into 'amounts falling due within one year' or 'amounts falling due after more than one year'... The financial statements presentation is this: Creditors' rights are the procedural provisions designed to protect
234-411: A right of redemption , whereby a debtor may arrange for late payment of the debt but keep the property. Debt can become secured by a contractual agreement , statutory lien , or judgment lien . Contractual agreements can be secured by either a purchase money security interest (PMSI) loan, where the creditor takes a security interest in the items purchased (i.e. vehicle, furniture, electronics); or,
273-485: A combination of both. Such loans may be made by foreign governments to developing countries or may be offered to employees of lending institutions as an employee benefit (sometimes called a perk ). Loans can also be categorized according to whether the debtor is an individual person (consumer) or a business. Common personal loans include mortgage loans , car loans, home equity lines of credit, credit cards , installment loans , and payday loans . The credit score of
312-429: A company which "has encountered, or is likely to encounter, financial difficulties". Secured loan A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults , the creditor takes possession of
351-411: A direct auto loan, a bank lends the money directly to a consumer. In an indirect auto loan, a car dealership (or a connected company) acts as an intermediary between the bank or financial institution and the consumer. Other forms of secured loans include loans against securities – such as shares, mutual funds, bonds, etc. This particular instrument issues customers a line of credit based on the quality of
390-601: A loan with attractive interest rates and repayment periods for the secured debt. Before the global economic crisis of 2006, the Financial Services Authority (FSA) estimated that the UK secured loan market had a net worth of £7,000,000,000. However, following the close of Lehman Brothers ' sub-prime lender BNC Mortgage in August 2007, the UK's most prominent secured loan providers were forced to withdraw from
429-413: A particular creditor usually depend in part on the reason for which the debt is owed, and the terms of any writing memorializing the debt. Creditors' rights deal not only with the rights of creditors against the debtor, but also with the rights of creditors against one another. Where multiple creditors claim a right to levy against a particular piece of property, or against the debtor's accounts in general,
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#1732790775551468-482: Is a loan on which the interest is reduced by an explicit or hidden subsidy . In the context of college loans in the United States , it refers to a loan on which no interest is accrued while a student remains enrolled in education. A concessional loan, sometimes called a "soft loan", is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods, or
507-418: Is a typical source of funding. A secured loan is a form of debt in which the borrower pledges some asset (i.e., a car, a house) as collateral . A mortgage loan is a very common type of loan, used by many individuals to purchase residential or commercial property. The lender, usually a financial institution, is given security – a lien on the title to the property – until
546-473: Is discharged of indebtedness. Thus, if a debt is discharged, then the borrower essentially has received income equal to the amount of the indebtedness. The Internal Revenue Code lists "Income from Discharge of Indebtedness" in Section 61(a)(12) as a source of gross income . Example: X owes Y $ 50,000. If Y discharges the indebtedness, then X no longer owes Y $ 50,000. For purposes of calculating income, this
585-414: Is enforced by contract , which can also place the borrower under additional restrictions known as loan covenants . Although this article focuses on monetary loans, in practice, any material object might be lent. Acting as a provider of loans is one of the main activities of financial institutions such as banks and credit card companies. For other institutions, issuing of debt contracts such as bonds
624-409: Is not based upon credit score but rather credit rating . The most typical loan payment type is the fully amortizing payment in which each monthly rate has the same value over time. The fixed monthly payment P for a loan of L for n months and a monthly interest rate c is: For more information, see monthly amortized loan or mortgage payments . Predatory lending is one form of abuse in
663-552: Is somehow improved through the work or materials provided by the person filing a mechanics lien. Although the rules are complex, consent of the title owner to the mechanics lien itself is not required. In the case of personal property , the most common procedure for securing the debt is regulated under Article 9 of the Uniform Commercial Code (UCC). This uniform act provides a relatively uniform interstate system of forms and public filing of documents by which
702-461: The creditor establishes the priority of their security interest in the property of the debtor. In the event that the underlying debt is not properly paid, the creditor may decide to foreclose the interest in order to take the property . Generally, the law that allows the secured debt to be made also provides a procedure whereby the property will be sold at public auction , or through some other means of sale. The law commonly also provides
741-539: The Insolvency Practitioner and readily accept annual reports when submitted. Under the Companies Act 2006 , a company's creditors may apply to the court for an order summoning a meeting of the creditors or some of the creditors who fall into a specific category, in order to consider a compromise or " arrangement " between the company and its creditors. If a majority representing 75% in value of
780-554: The United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974 . Interest rates on unsecured loans are nearly always higher than for secured loans because an unsecured lender's options for recourse against the borrower in the event of default are severely limited, subjecting the lender to higher risk compared to that encountered for a secured loan. An unsecured lender must sue
819-456: The ability of creditors—persons who are owed money—to collect the money that they are owed. These provisions vary from one jurisdiction to another, and may include the ability of a creditor to put a lien on a debtor's property, to effect a seizure and forced sale of the debtor's property, to effect a garnishment of the debtor's wages, and to have certain purchases or gifts made by the debtor set aside as fraudulent conveyances . The rights of
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#1732790775551858-421: The acceptable interest rate has varied, from no interest at all as in the biblical prescript, to unlimited interest rates. Credit card companies in some countries have been accused by consumer organizations of lending at usurious interest rates and making money out of frivolous "extra charges". Abuses can also take place in the form of the customer defrauding the lender by borrowing without intending to repay
897-471: The added security for the lender; however, credit risk (e.g. credit history , and ability to repay) and expected returns for the lender are also factors affecting rates. The term secured loan is used in the United Kingdom, but the United States more commonly uses secured debt . There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt,
936-452: The area of creditor's rights perform one or all of the following: In the UK, once an Individual Voluntary Arrangement (IVA) has been applied for, and is in place through the courts, creditors are prevented from making direct contact under the terms of the IVA. All ongoing correspondence of an IVA must first go through the appointed Insolvency Practitioner . The creditors will begin to deal with
975-423: The asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the foreclosure of a home. From the creditor's perspective, that is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain
1014-502: The borrower is a major component in underwriting and interest rates ( APR ) of these loans. The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well. A personal loan can be obtained from banks, alternative (non-bank) lenders, online loan providers and private lenders. Loans to businesses are similar to the above but also include commercial mortgages and corporate bonds and government guaranteed loans Underwriting
1053-413: The borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in
1092-417: The case of real estate , the most common form of secured debt is the lien . Liens may either be voluntarily created, as with a mortgage , or involuntarily created, such as a mechanics lien . A mortgage may only be created with the express consent of the title owner , without regard to other facts of the situation. In contrast, the primary condition required to create a mechanics lien is that real estate
1131-446: The collateral, and by whether the debt was created as a purchase money security interest . A creditor may generally ask a court to set aside a fraudulent conveyance designed to move the debtor's property or funds out of their reach. Some lawyers have a specialized practice area focused on the collection of such debts . Such attorneys are frequently referred to as collection attorneys or collection lawyers. Attorneys who practice in
1170-481: The creditor is relieved of most of the financial risks involved because it allows the creditor to take ownership of the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt , or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all. The creditor may offer
1209-454: The creditors or class of creditors present and voting either in person or by proxy at the meeting agree a compromise, the meeting may apply to the court for the compromise to be enforced. The same provision would apply to members ( shareholders ) of a company seeking to make an arrangement with the company. The Corporate Insolvency and Governance Act 2020 makes similar provision where a compromise has been proposed between creditors or members and
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1248-432: The event of insolvency, the debt may be uncollectible. Demand loans are short-term loans that typically do not have fixed dates for repayment. Instead, demand loans carry a floating interest rate , which varies according to the prime lending rate or other defined contract terms. Demand loans can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured. A subsidized loan
1287-433: The granting of loans. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them; subprime mortgage-lending and payday-lending are two examples, where the moneylender is not authorized or regulated , the lender could be considered a loan shark . Usury is a different form of abuse, where the lender charges excessive interest. In different time periods and cultures,
1326-555: The loan. Most of the basic rules governing how loans are handled for tax purposes in the United States are codified by both Congress (the Internal Revenue Code) and the Treasury Department (Treasury Regulations – another set of rules that interpret the Internal Revenue Code). Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower
1365-674: The market. The United States is the global leader in security interest law with respect to personal property; in the 1940s, it was the first country to develop and enact the notion of a "unified" security interest. That concept has since spread to many countries around the world after it became evident that it is one of the reasons for why the United States has the strongest economy in the world. For example, to raise money, American ranchers could pledge personal property like cattle in certain ways that historically were impossible or very difficult in Uruguay or most other developing countries. In
1404-442: The mortgage is paid off in full. In the case of home loans, if the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. Similarly, a loan taken out to buy a car may be secured by the car. The duration of the loan is much shorter – often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. In
1443-411: The quality of pledged collateral before sanctioning the loan. Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages: The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In
1482-406: The rules governing creditors' rights determine which creditor has the strongest right to any particular relief. Generally, creditors can be divided between those who " perfected " their interest by establishing an appropriate public record of the debt and any property claimed as collateral for it, and those who have not. Creditors may also be classed according to whether they are "in possession" of
1521-428: The securities pledged. Gold loans are issued to customers after evaluating the quantity and quality of gold in the items pledged. Corporate entities can also take out secured lending by pledging the company's assets, including the company itself. The interest rates for secured loans are usually lower than those of unsecured loans. Usually, the lending institution employs people (on a roll or on a contract basis) to evaluate
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