The process involves pooling these loans, dividing them into different risk layers (or tranches), and selling these tranches to investors. Investors receive payments based on the cash flows from the underlying debt, with senior tranches receiving payments first and junior tranches taking on higher risk but offering higher returns.

ABS provide liquidity to financial institutions by allowing them to offload the risk of loans, while offering investors opportunities to diversify their portfolios. However, ABS comes with risks such as credit risk (the risk of loan defaults), prepayment risk (when loans are paid off early), and liquidity risk (difficulty selling ABS in certain market conditions). Despite these risks, ABS are widely used as a way to raise funds and invest in debt tied to various asset types.