Asset-Backed Security (ABS)

An Asset-Backed Security (ABS) is a type of financial investment that is created by pooling together various income-generating assets, such as loans or receivables, and then selling shares of this pool to investors. The cash flows from the underlying assets—like loan repayments—are used to pay interest and principal to the investors. This process allows the original lenders to free up capital to make more loans or investments. ABS helps diversify risk and provides investors with access to credit-like income streams, all backed by the actual assets such as car loans, credit card debt, or mortgages.