Asset-backed security (ABS)
Principles of Finance glossary · Principles Of Finance
Definition
A security collateralized by a pool of receivables (auto loans, credit cards, student loans, etc.).
Asset-backed security (ABS) in plain English
An asset-backed security (ABS) is an investment you can buy whose payments come from a big bundle of everyday loans — car loans, credit-card balances, student loans — all packaged together. Here's the trick: a bank makes thousands of small loans, then pools them and sells slices of that pool to investors, who collect a share of the monthly payments borrowers make. It's like a landlord who owns 500 apartments selling you a piece of the rent check from all of them at once, so one deadbeat tenant barely dents your income. Bundling many loans spreads out the risk that any single borrower stops paying, which is the whole appeal — though if lots of them default together, investors still get hurt.
Also called: ABS
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