A significant advantage of asset-backed securities is that they bring together a pool of financial assets that otherwise could not easily be traded in their existing form. By pooling together a large portfolio of these illiquid assets they can be converted into instruments that may be offered and sold freely in the capital markets. Their bankruptcy remoteness allows the investor to take on credit risk of the asset without taking on specific corporate credit risk of the originator. The tranching of these securities into instruments with different risk/return profiles facilitates marketing of the bonds to investors with different risk appetites and investing time horizons.

Asset-backed securities enable the originators of the loans to enjoy most of the benefits of lending money without bearing the risks involved. They offer originators the following advantages:

• Selling these financial assets to the pools reduces their risk-weighted assets and thereby frees up their capital, enabling them to originate still more loans.
• Asset-backed securities lowers their risk. In a worst-case scenario where the pool of assets performs very badly, the owner of ABS would pay the price of bankruptcy rather than the originator.
• The originators earn fees from originating the loans, as well as from servicing the assets throughout their life.

"The financial institutions that originate the loans sell a pool of cashflow-producing assets to a specially created third party that is called a special-purpose vehicle (SPV). The SPV is designed to insulate investors from the credit risk of the originating financial institution. The SPV then sells the pooled loans to a trust, which issues interest bearing securities that can achieve a credit rating separate from the financial institution that originates the loan. The typically higher credit rating is given because the securities that are used to fund the securitization rely solely on the cash flow created by the assets, not on the payment promise of the issuer. The monthly payments from the underlying assets—loans or receivables—typically consist of principal and interest, with principal being scheduled or unscheduled. The cash flows produced by the underlying assets can be allocated to investors in different ways. Cash flows can be directly passed through to investors after administrative fees are subtracted, thus creating a “pass-through” security; alternatively, cash flows can be carved up according to specified rules and market demand, thus creating "structured" securities." ^[5]