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The issuers of ALBS are the financial subsidiaries of automobile manufacturers, commercial banks and other independent finance companies and small financial institutions specializing in auto loans. The period of loan typically varies from 3 years to 6 years.
Cash Flows and Prepayments
The cash flow for auto loans includes interest payment, principal repayment payable at regular intervals and any prepayments. Prepayments may be due to:
Re-acquisition followed by resale of the automobile
Loss or destruction of the vehicle
An attempt to save interest cost
An attempt to refinance the loan at a lower interest cost.
Prepayment due to re-acquisition followed by resale of the automobile depends on the prevailing economic conditions. During economic recession, prepayments tend to increase. Prepayment due to refinancing is not common in automobile loans. The speed at which prepayments are made in ALBS is measured in terms of the Absolute Prepayment Speed (APS).
The structure of auto loan backed deals can be either of pass-through or pay-through type.
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