a. 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 financial subsidiaries of the automobile manufacturers often offer loans below the market rates.
b. The period of loan typically varies from 3 years to 6 years.
c. The categories of loans vary from the prime to the sub-prime
d. The prime loan is high-credit quality and secured loans. They begin to repay principal and interest
These loans are generally short-term in nature and are generated by the financial subsidiaries of the automobile manufacturing companies. These loans generally have a probability of losses of less than 3%.
e. The sub-prime and near-prime loans are the ones having the expected losses of more than 7% and between 3% and 7% respectively. These loans, like home loans, do not have clear underwriting standards.
e. The cash flow for auto loans includes interest payment, principal repayment payable at regular intervals, and any prepayments.
f. The prepayments, if any, may be due to:
i. Sale and trade-ins
ii. Re-acquisition followed by the resale of automobile
iii. Loss or destruction of the vehicle
iv. An attempt to save interest cost
v. Early retirement
vi. 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 the economic recession, prepayment tends to increase. Prepayment due to refinancing is not common in automobile loans. The speed at which the prepayments are made in the ALBs is measured in terms of the Absolute Prepayment Speed (APS).
g. The structure of auto loan-backed deals can be either of pass-through or pay-through type.
h. All ALBS have some form of credit enhancement, such as:
i. Credit tranching (having senior, mezzanine, and equity/subordinate tranches)
ii. Reserve account (such as $ 5 million for a $ 100 million loan)
iii. Overcollateralization (such as $ 100 million issues against $ 110 million assets)
iv. Excess interest