Why would a close competitor get an loan through an investment bank, business and finance homework help

Why would a close competitor get an loan through an investment bank, business and finance homework help

You are a finance employee at a financial institution, specializing in originating auto loans in a country where auto loans have only been available for 2 years. Your group has just been informed that a close competitor has securitized $150 million in auto loans through an investment bank.

• Your boss wants to understand why the competitor did this. Explain.
• He also wants to understand the potential benefits for the following:
  • the issuer
  • the investors buying the ABS
  • the individual borrowers seeking auto loans
• He also wants to know the likely impact to the auto loan market in this country if a large, liquid ABS market emerges over the next few years.

Solution Preview

One of the central reasons as to why the competitor might have taken the auto loan is because it facilitates towards eventually owning a piece of property through the payment of installments that one can afford. Auto loans are better than leasing of as they enable the competitor to acquire high valued property after the settlement of the credit. The competitor might have also considered taking the auto loan as it raises the credit rating of the borrower when paid on time and hence gives one a chance to secure investments in the future. The issuer benefits from the activity as installment payment goes a long way in providing the highest selling price of an asset.

(304 words)