GMAC Car Loans Back Securities Issues

2007-03-08 10:33:40

( Financial )



You may have wondered what happens after you and other car buyers have obtained GMAC car loans to cover the purchase of your cars. In the financing industry, the GMAC car loans you get through your car dealer are called indirect loans, as opposed to direct loans which you obtain direct from your local bank or credit union.

In indirect loans, your dealer actually sells your mortgage contract to GMAC mortgage company, through their GMAC car loans program. Your dealer retains a portion of the finance charge upon selling your contract, which becomes income for the dealership. This compensates your dealer for the costs (time and resources) involved in handling credit transactions.

To ensure that the company’s cash will not run out for additional GMAC car loans, GMAC mortgage company goes to the secondary market and also sells your GMAC auto loan mortgage contract. The company issues GMAC commercial mortgage paper and sells these as asset-backed securities (called certificates for automobile receivables or CARS) in the commercial paper market. These securities are comparable to short-term corporate debt, and your payments to your GMAC auto loans will be used to repay that debt.

Since your GMAC loan will mature in three to five years, GMAC will program repayment of the securities in about one to three years, but the securities will bear specified maturities of three to five years. The expected actual life of the certificate is generally shorter than the specified maturity because there will be early payoffs when you sell or trade-in your car.

Since GMAC mortgage company started issuing these asset-backed securities, they have become popular among investors and have assured a steady flow of cash proceeds to help finance GMAC car loans. Their success has also served as an indication of the potential for issuing additional collateralized securities backed by other assets and debt instruments.


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