medium · Asset-Backed Securities asset-nuances
An auto loan pool includes 72-month and 84-month loans. How does this 'term extension' typically affect the expected loss curve compared to a 60-month pool?
- The loss curve becomes a flat horizontal line because the extended-term borrower base is inherently more stable
- The recovery rate increases because the underlying cars are comparatively newer at the point of default
- Losses peak later and remain elevated for a longer period because the loans stay 'underwater' (LTV > 100%) longer.
- Losses are front-loaded because the higher monthly payments strain borrowers sooner in the loan's life
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