Interest rates remain very low, making people more willing to take a while for “a little bit higher” interest rates. This has renewed interest in the funding arms of several automotive brands that provide “need notes” which they utilize to finance the loans and leases they have to make to market automobiles. (Can you imagine just how much fewer new cars could be sold without funding?)
These need notes allow you to “demand” your money back at any time, while they can also end the program at any time (as Ally recently did). Significantly, they pay a greater factor interest rate than most FDIC-insured high-yield savings accounts. Equally significantly, even though it functions like a lender, it isn’t a lender and your cash isn’t covered by FDIC insurance. You are purchasing unsecured debt backed by a finance company (not necessarily the actual automobile maker), and if it struggles, you may lose principal. Here is a listing of some available options on the market:
Current interest rate: 1.50% (as of 5/17/21)
Minimum initial investment: $500
Fitch credit score: BBB-
Restricted to GM/GM Financial US workers and employees, US workers of GM dealerships, GM customers, along with GM stockholders.
The GM Financial Right NotesSM program is a direct investment in need notes issued by General Motors Financial Company, Inc.. Proper Notes cover a variable interest rate and are redeemable at any time. An investment at the Right Notes will not make a bank account or a money market fund and isn’t FDIC insured.
Current interest rate: 1.35% (as of 5/17/21)
Minimum initial investment: $500
Fitch credit score: A+
The IncomeDriver Notes® program is a direct investment in senior notes issued by Toyota Motor Credit Corporation (“TMCC”-RRB-. IncomeDriver Notes® cover a variable interest rate and are redeemable at any time. IncomeDriver Notes® aren’t a bank account or a money market fund and aren’t FDIC insured.
Mercedes-Benz First Class Notes
Current interest rate: 1.10% (as of 5/17/21)
Minimum investment: $10,000 to prevent $5 monthly charge Fitch credit score: n/a
Restricted to accredited investors only.
An investment from the First Class Demand Notes app does not produce a FDIC insured bank account. All investments are senior, unsecured debt obligations Mercedes-Benz Financial Services and aren’t guaranteed or insured by anybody else.
Current interest rate: 0.45percent to 0.65percent (based on equilibrium, as of 5/17/21)
Minimum investment: $1,000
Fitch credit score: BB+
The Notes issued under the Ford Interest Advantage Program are unsecured obligations of Ford Motor Credit Company LLC. They aren’t insured by the Federal Deposit Insurance Corporation, they aren’t ensured by Ford Motor Company, and they don’t constitute a bank account.
Caterpillar PowerInvestment Notes
Current interest rate: 0.05percent to 0.20percent (based on equilibrium, as of 5/17/21)
Minimum investment: $250
Fitch credit score: A
An investment from the Cat Financial PowerInvestment notes allows individuals and institutions to benefit from the financial strength of Caterpillar Financial Services Corporation. It is necessary to remember the Cat Financial PowerInvestment isn’t a money market account, which is typically a diversified fund composed of short-term securities of several issuers. An investment from the PowerInvestment notes will not fulfill the diversification and investment quality standards set forth for money market funds by the Investment Company Act of 1940.
Dominion Energy Reliability Investment Notes
Current interest rate: 1.25% to 1.50percent (based on equilibrium, as of 5/17/21)
Minimum investment: $1,000
Fitch credit score: BBB+
Dominion Energy Reliability Investment isn’t thought of as a deposit or other bank account, and isn’t subject to the protection of Federal Deposit Insurance Corporation (FDIC) law or insurance, or some additional insurance. The investments have been direct purchases of new debt obligations of Dominion Energy.
Current interest rate: 0.45percent to 0.65percent (based on equilibrium, as of 5/17/21)
Minimum investment: $1,000 to avoid $10 monthly charge Fitch credit score: Withdrawn
Regardless, the notes aren’t equal to a deposit or other bank account, and aren’t subject to the protection of Federal Deposit Insurance Corporation (FDIC) law or insurance, or some other insurance. The notes have been direct investments in debt commitments of Duke Energy.
Also see: WSJ article #1, WSJ article #two , Bogleheads forum dialogue , Early Retirement forum dialogue .
Financial consultants, however, often advise clients against tying up their money in 1 business. Those who rely on fixed-income payments as a kind of earnings, like retirees, should particularly avoid this concentration,” says Larry Swedroe, chief research officer at Buckingham Strategic Wealth.
“I would want to buy a enormous portfolio of hundreds of these so I wouldn’t even have the risk of Toyota,” he explained. “The average investor purchasing this stuff isn’t going to be able to examine the risk in each of those floating rate notes. ”
My take. Given that US Treasury rates outside to 1 year maturity will be paying 0.06% right now and most online savings account are paying around 0.50%, it’so easy to determine how these rates could be appealing. However, not just are those notes not FDIC-insured, they’re not much less secure as money market funds, which can be diversified amongst several different investment-grade businesses. With these need notes, you’re buying the unsecured debt of a single company. I don’t feel like needing to pay attention to the credit rating of a business for my money. In 2008, Lehman Brothers’ bonds were rated AA by S&P just days before they went bankrupt. The ultimate recovery rate on Lehman bonds was just about 20 cents on the dollar. Stuff happens.
Additionally, bank account are governed differently than securities offered via prospectus (where they detail all potential risks). As an example, Regulation E provides the next consumer protection: As long as I notify the lender within a timely manner, my liability for an unauthorized electronic fund transfers, including those arising from theft or loss from an access device, is limited to $50. Fifty bucks. These need notes aren’t covered by the exact identical consumer protections.
Finally, you have to take into account all of your accessible alternatives. Personally, I have no plans to put money into one or more of these need notes as with similar effort, I can get higher interest rates on my money from FDIC-insured sources. I’m earning 3% APY up to $100,000 by moving within my direct deposit, and along together with other additional alternatives out there. See my latest monthly interest rate roundup (future upgrades connected on appropriate sidebar or at the Banking category). In the event the Toyota need notes were paying over 3%, then I might become interested.
Bottom line. The fiscal arms of major auto makers (along with a few energy companies) are offering higher interest rates through accounts that operate as a savings account (elastic deposits and withdrawals, limited checkwriting). However, these aren’t FDIC-insured, but really unsecured debt involves the potential loss of principal. You have to choose if that extra risk is adequately compensated by the greater interest. If you’re eager to start an new account to pursue high rates, there could be other alternatives available that maintain FDIC insurance.
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Big List of Car Demand Notes (GM, Ford, Toyota) & Other Non-FDIC Deposit Accounts: Up to 1.50% Interest from My Money Blog.
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