Lesson 3 of 6 · 14 min
Amortizing vs non-amortizing collateral: credit card ABS
Auto loans repay principal every month, so auto ABS shrink from day one; credit card balances do not amortize, so credit card ABS reinvest repaid principal during a revolving period and only start returning it to investors afterwards.
In short
- Amortizing collateral (auto loans, traditional mortgages): each payment includes principal and interest; investors receive scheduled principal plus prepayments, and the pool shrinks over time.
- Non-amortizing collateral (credit card receivables): no scheduled principal repayments.
- During the lockout or revolving period, principal repaid is reinvested in new receivables, so the pool is replenished. In the amortization period that follows, principal is passed to ABS holders.
- Credit card ABS cash flows: finance charges, fees (late, annual) and principal. In the revolving period investors get only finance charges and fees.
- Early (rapid) amortization provisions return principal early if the pool cannot be replenished or defaults change it materially.
- Issuer benefits: receivables off the balance sheet (capital efficiency, cheaper funding), lower cost of default risk, extra fee income.
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