When you take a loan, the bank can “sell” your loan to an investor. What does that process look like, and why would an investor want to buy loans?
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I don’t think that personal loans are really common enough for this to be a thing.
But when it comes to mortgages and business loans, there is a thing called CDO or collateralized debt obligation, which in turn is a type of ABS, asset backed securities.
Basically, a large bundle of loans is “securitized”. Which mostly means that a shell company is formed to own a large bundle of loans and then investors can buy a share of a CDO, which is like one small piece of a bundle of tons of loans.
The CDO will be separated into traunches based on risk requirements. But basically, because there are so many loans bundled together it’s stasticaly very unlikely for a CDO to fail. So they make for interesting investments. And banks sell them because… They can I guess? If they can collect the loans, bundle them and securitize them they will get their cut on the way.
My understanding is that a type of CDO called a mortgage backed security, was largely responsible for the 2008 recession. People say that this sort of thing won’t happen again because today’s CDO of favor- the CLO isn’t tied to consumer mortgage rates and exposed to a single market.
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