Auto loans
The second largest subsector in the ABS market is auto loans. Auto finance companies issue securities backed by underlying pools of auto-related loans. Auto ABS are classified into three categories: prime, nonprime, and subprime:
Prime auto ABS are collaterized by loans made to borrowers with strong credit histories. Nonprime auto ABS consist of loans made to lesser credit quality consumers, which may have higher cumulative losses.Subprime borrowers will typically have lower incomes, tainted credited histories, or both.Owner trusts are the most common structure used when issuing auto loans and allow investors to receive interest and principal on sequential basis. Deals can also be structured to pay on a pro-rata or combination of the two.
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