What are loan-backed securities?

Loan-backed securities (LBS) are bonds backed by a pool of loans. The types of loans can be car loans, credit card debt, student loans and even solar power loans, but they do not include mortgages.

Where have you heard about loan-backed securities?

Packages of toxic loans that were sold off to investors became synonymous with the financial crisis of 2008. In Europe, the LBS market has struggled to recover from the economic meltdown.

What you need to know about loan-backed securities.

When a consumer takes out a loan, their debt becomes an asset on the balance sheet of the lender. The lender will bundle its loans into an asset-backed security to sell in the public market.

Loans are bundled into tranches according to the class and credit rating of the debtors. Investors can then choose a bond to put their money into based on their risk tolerance.

Loan-backed securities pay a higher yield than more traditional options carrying the same credit rating, but they do rely on people paying back their loans.

Find out more about loan-backed securities.

Read our mortgage-backed securities page to compare them with the LBS market.