Asset-Backed Securities (Installment Loans)
Asset-backed securities can have a variety of underlying collateral and its terms and features are customized based on the underlying collateral.
One of the commonly used collateral installment receivables such as automobile-finance receivables.
The securities backed by closed-end installment loans are the least complex forms of asset-backed securities. These installment loans could include leases, automobile loans, and student loans. The pool of such loans may not be heterogeneous and may have varying maturities. Also the trustee is not required to take physical possession of account documents to perfect their security interest.
For these installment loans, the repayments are quite predictable, however, prepayments may occur for several reasons, such as the sale of vehicle (in case eof automobile loan).
These securities pay a fixed interest rate to the bondholders, which is is slightly lower than the weighted average coupon of the loan pool, allowing for servicing and other expenses as well as credit losses.