Borrowers and How They Manage Credit

The term borrower refers to any company, corporation, entity, and individual who uses services, goods, materials, or money on credit. Borrowers pay interest on loans and credit card balances.

Types of Borrowers

According to psychologists, there are different types of borrowers – winners, wanters, wasters, and wishers. Wishers, for example, are optimistic about their ability to service debt. They tend to overlook factors such as annual and monthly fees, prepayment penalties, interest rates, and loan terms. They believe that monthly payments are affordable and will be able to cover them on a monthly basis. Wishers often overspend and have multiple card accounts and debts. Wanters fall into another category. They are people who buy on credit despite the fact that they are unable to pay back their loans. Wanters have poor financial management skills and lack self-discipline. Wasters are usually people with low self-esteem who buy goods on credit when they are bored, worried, disappointed, or had a bad day at work. Shopping helps them to relax and relieves feelings of emptiness, anger, and discomfort. Winners are people who delay immediate satisfaction and know the difference between good and bad debt. Here bad debt includes personal loans such as car and payday loans and credit card balances. These are loans that the borrower has to repay. Winners take out loans and invest in real estate properties. They rent the property and use the rental income to pay off the loan.

Types of Debtors That Collectors Deal With

There are different types of debtors, based on their ability and willingness to repay loans and credit card balances. Some borrowers are willing but unable to service debt while others are unwilling and able to pay off their loans. The first group includes people who are willing but unable due to serious or prolonged illness, unemployment, divorce, and other problems. Financial institutions are often willing to discuss the terms and interest rate and will modify the repayment schedule. Other borrowers are able but unwilling to pay off their debts. They file lawsuits, threaten with bankruptcy, and use other strategies to avoid debt repayment. Credit criminals or abusers form another category. They avoid repayment by using illegal means. Litigants, recurrent offenders, and con artists fall in this category. Finally, collectors also deal with slow payers who often miss payments or make late payments. There are different reasons why borrowers turn into slow payers. Unexpected circumstances, large medical bills, prolonged unemployment, and loss of income are some of the reasons. Collection agencies use different strategies to deal with each of the four categories. When dealing with credit abusers, they often file a lawsuit against them. Frequent reminders work well for people who are often behind on their monthly payments.

Business and Individual Borrowers

Companies and individual borrowers form two categories. Individual borrowers apply for personal credit cards, lines of credit, car and auto loans, mortgages, and payday loans. They can choose from secured and unsecured debt. The types of loans and the terms offered depend on the borrower’s credit score, income level, employment and payment history, debt-to-level ratio, and other factors. In some cases, financial institutions require that a cosigner guarantees repayment. Business loans form another category. Companies can choose from different types of financing, including small business loans, lines of credit, franchise start-up loans, micro loans, and acquisition loans. The two categories of borrowers use the funds for different purposes. Individual borrowers take out loans to buy goods and services, pay their tuition, make home improvements, or buy a real estate property. Some borrowers also invest in different asset classes. Companies, on the other hand, apply for financing to buy machinery and equipment and to expand their business operations. They take out loans to meet their short-term operational or start-up costs or to increase their cash flows. They also need money for emergency maintenance and repairs.

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