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Understanding Process of Securitization

Securitization

When attempting to understand the process of securitization, a good portion of the available information may be overwhelming and confusing. Securitization is a detailed and complex process, but it is most beneficial to creditors.

A lender may issue securitizations in order to obtain financial funds, isolate assets, and increase productivity. Many different types of assets may be involved in securitizations, including home mortgages, student loans, and auto loans. Often, lenders become so involved in numerous financial agreements that they do not have the financial resources to grant more loans. In order for a company to grant more loans, it will be required to eliminate the loans that it has already issued. Like a borrower, a lender is unable to discard a financial agreement.

Securitizations are not only important for lenders to receive access to finances, but they may also be essential for a creditor to compete with other lenders. For example, a bank may be required to grant loans at higher rates than competitors due to poor credit and an increased financing cost. If the lender wishes to contend with these competitors in other areas of finance, such as home mortgages, they will be required to isolate their finances. This can be accomplished through securitization. As a result, the high rates attached to their general loans will not affect their home mortgage loans. A creditor will be able to grant home mortgage loans at a low rate, and therefore, will be able to contend with competitors.

NEXT: What You Should Know About Credit Cards for Everyday Use

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