What is a Debtor?
A debtor is an individual, business, or entity that owes money to another party, known as the creditor. This debt can arise from loans, purchases on credit, or unpaid invoices.
Key Characteristics of a Debtor:
- Owes money to a lender, supplier, or creditor.
- Can be an individual, business, or government entity.
- Typically has a formal agreement with the creditor regarding repayment terms.
- If payments are not made, the creditor may impose penalties, legal action, or credit score reductions.
Types of Debtors
- Trade Debtors (Customers):
- Individuals or businesses that have purchased goods or services on credit.
- Example: A retail store buying inventory from a supplier on credit.
- Loan Debtors (Borrowers):
- Those who have taken loans from banks or financial institutions.
- Example: A person with a home loan, car loan, or personal loan.
- Government or Institutional Debtors:
- Governments borrowing money through bonds or international loans.
- Example: A government issuing bonds to raise capital.
How Does One Become a Debtor?
- Purchasing on Credit: Buying products or services without immediate payment.
- Taking a Loan: Borrowing from a bank, financial institution, or private lender.
- Issuing Bonds: When companies or governments borrow by selling debt securities.
Failure to repay debt on time can result in:
- Penalties & Fines imposed by the creditor.
- Legal action if debts remain unpaid.
- Lower credit score, affecting future borrowing ability.
Benefits of Being a Debtor
- Access to Funds: To buy things, expand or invest.
- Payment Flexibility: Structured repayment through instalments or deferment.
- Growth Leverage: Companies can use borrowed funds for expansion and increase revenue.
Key Takeaways
- Rising Interest Rates Hurting Borrowers: Higher loan payments due to central bank policies.
- New Debt Relief Programs: The government introduced schemes for debt-ridden individuals and businesses.
- Tighter Credit Rules: Banks are getting stricter with lending to reduce bad debts.
