Big List of Car Demand Notes (GM, Ford, Toyota) & Other Non-FDIC Deposit Accounts: Up to 1.50% Interest

Interest rates remain very low, which makes people more willing to take some risk for “just a little bit higher” interest rates. This has renewed interest in the financing arms of many automotive brands that offer “demand notes” which they use to fund the loans and leases they need to make to sell cars. (Can you imagine how much fewer new cars would be sold without financing?)

These demand 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). Importantly, they pay a higher variable interest rate than most FDIC-insured high-yield savings accounts. Equally importantly, although it functions like a bank, it is not a bank and thus your money is not covered by FDIC insurance. You are buying unsecured debt backed by a finance company (not necessarily the actual car maker), and if it struggles, you may lose principal. Here is a list of some available options on the market:

GM Financial Right Notes

• Current interest rate: 1.50% (as of 5/17/21)
• Minimum initial investment: $500
• Fitch credit rating: BBB-
• Restricted to GM/GM Financial US employees and retirees, US employees of GM dealerships, GM customers, and GM stockholders.

The GM Financial Right NotesSM program is a direct investment in demand notes issued by General Motors Financial Company, Inc. Right Notes pay a variable rate of interest and are redeemable at any time. An investment in the Right Notes does not create a bank account or a money market fund and is not FDIC insured.

Toyota IncomeDriver Notes

• Current interest rate: 1.35% (as of 5/17/21)
• Minimum initial investment: $500
• Fitch credit rating: A+

The IncomeDriver Notes® program is a direct investment in senior notes issued by Toyota Motor Credit Corporation (“TMCC”). IncomeDriver Notes® pay a variable rate of interest and are redeemable at any time. IncomeDriver Notes® are not a bank account or a money market fund and are not FDIC insured.

Mercedes-Benz First Class Notes

• Current interest rate: 1.10% (as of 5/17/21)
• Minimum investment: $10,000 to avoid $5 monthly fee
• Fitch credit rating: n/a
• Restricted to accredited investors only.

An investment in the First Class Demand Notes program does not create a FDIC insured bank account. All investments are senior, unsecured debt obligations of Mercedes-Benz Financial Services and are not insured or guaranteed by anyone else.

Ford Interest Advantage Notes

• Current interest rate: 0.45% to 0.65% (depending on balance, as of 5/17/21)
• Minimum investment: $1,000
• Fitch credit rating: BB+

The Notes issued under the Ford Interest Advantage Program are unsecured debt obligations of Ford Motor Credit Company LLC. They are not insured by the Federal Deposit Insurance Corporation, they are not guaranteed by Ford Motor Company, and they do not constitute a bank account.

Caterpillar PowerInvestment Notes

• Current interest rate: 0.05% to 0.20% (depending on balance, as of 5/17/21)
• Minimum investment: $250
• Fitch credit rating: A

An investment in the Cat Financial PowerInvestment notes allows individuals and institutions to benefit from the financial strength of Caterpillar Financial Services Corporation. It is important to note that Cat Financial PowerInvestment is not a money market account, which is typically a diversified fund consisting of short-term debt securities of many issuers. An investment in the PowerInvestment notes does not meet 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 1.50% (depending on balance, as of 5/17/21)
• Minimum investment: $1,000
• Fitch credit rating: BBB+

Dominion Energy Reliability Investment is not considered to be a deposit or other bank account, and is not subject to the protection of Federal Deposit Insurance Corporation (FDIC) regulation or insurance, or any other insurance. The investments are direct purchases of new debt obligations of Dominion Energy.

Duke Energy PremierNotes

• Current interest rate: 0.45% to 0.65% (depending on balance, as of 5/17/21)
• Minimum investment: $1,000 to avoid $10 monthly fee
• Fitch credit rating: Withdrawn

No, the notes are not equivalent to a deposit or other bank account, and are not subject to the protection of Federal Deposit Insurance Corporation (FDIC) regulation or insurance, or any other insurance. The notes are direct investments in new debt obligations of Duke Energy.

Also see: WSJ article #1, WSJ article #2, Bogleheads forum discussion, Early Retirement forum discussion.

Financial advisers, however, often advise clients against tying up their money in one company. Those who rely on fixed-income payments as a form of income, such as retirees, should particularly avoid such concentration, says Larry Swedroe, chief research officer at Buckingham Strategic Wealth.

“I would want to buy a huge portfolio of hundreds of these so I wouldn’t have the idiosyncratic risk of Toyota,” he said. “The average investor buying this stuff is not going to be able to analyze the risk in each of these floating rate notes.”

My take. Given that US Treasury rates out to 1 year maturity are only paying 0.06% right now and most online savings account are paying around 0.50%, it’s easy to see how these rates can be attractive. However, not only are these notes not FDIC-insured, they are not even as safe as money market funds, which are diversified amongst multiple different investment-grade companies. With these demand notes, you are investing in the unsecured debt of a single company. I don’t feel like having to pay attention to the credit rating of a company for my cash. In 2008, Lehman Brothers’ bonds were rated AA by S&P just days before they went bankrupt. The eventual recovery rate on Lehman bonds was only about 20 cents on the dollar. Stuff happens.

In addition, bank accounts are regulated differently than securities sold through prospectus (where they detail all potential risks). For example, Regulation E provides the following consumer protection: As long as I notify the bank within a timely fashion, my liability for an unauthorized electronic fund transfers, including those arising from loss or theft of an access device, is limited to $50. Fifty bucks. These demand notes are not covered by the same consumer protections.

Finally, you have to consider all your available options. I personally have no plans to invest in any of these demand notes as with similar effort, I can get higher interest rates on my cash from FDIC-insured sources. I’m already earning 3% APY on up to $100,000 by moving over part of my direct deposit, with other additional options available. See my latest monthly interest rate roundup (future updates linked on right sidebar or in the Banking category). If the Toyota demand notes were paying over 3%, I might become interested.

Bottom line. The financial arms of major car makers (and a few energy companies) are offering higher interest rates through accounts that function like a savings account (flexible deposits and withdrawals, limited checkwriting). However, these are not FDIC-insured, but really unsecured debt involves the possible loss of principal. You have to decide if that added risk is adequately compensated by the higher interest. If you’re willing to open a new account to chase higher rates, there may be other options available that maintain FDIC insurance.