Mercedes wants to borrow some money from you. Should you bite?
This spring, tens of thousands of people who own or lease a Mercedes-Benz vehicle are receiving an unusual direct mail offer: an invitation to invest in short-term Mercedes securities paying an annual rate of 2.5%.
That sounds like a yield limo alongside the sub-1% jalopy rates you currently get on most bank accounts, certificates of deposit, or money market funds.
Whether the Mercedes cash vehicle or others like it is right for you mainly depends on whether you view cash as an offensive or defensive investment weapon.
If you urgently need more revenue from your money, it may be a good idea to invest a small portion in such a high-yielding issue. However, many investors view cash as a hedge against the risk of loss elsewhere in their portfolio – and in other aspects of their lives, for that matter.
In this case, money is no place to take unnecessary risks, no matter how small.
The Mercedes offering, launched in 2014 and sold more widely since last year, is called a privately placed floating rate demand note. You usually cannot invest unless you earn at least $200,000 a year ($300,000 if you file taxes jointly) or have $1 million in net worth, not including your primary residence.
There is no public market for the securities, which are issued by Mercedes-Benz Financial Services USA. You can withdraw your money at will and receive the product in two to three business days, depending on the company.
MBFS is the arm of Daimler that provides loans and leases for Mercedes and other cars, trucks and commercial vehicles sold by Daimler. The interest rate is set weekly by a committee of executives at Mercedes-Benz Financial; this Last modification on March 26, at 2.5% against 2%.
Several other companies have issued short-term, floating-rate demand notes directly to the public, including Ally Financial ,
Caterpillar Financial Services Corp., Duke Energy ,
Ford Motor Credit Corp. and General Motors Financial Co.
By marketing these securities primarily to employees or customers, companies can diversify their funding sources at a lower cost. Retail investors will often settle for lower rates than professional investors who buy corporate debt in the public market.
In general, these broadcasts are not secure; you’ll have to line up behind other creditors if an issuer ends up having trouble paying interest or principal. This type of debt is also not covered against losses by the Federal Deposit Insurance Corporation.
So far, several hundred investors have purchased several hundred million dollars worth of Mercedes-Benz Financial notes, according to people familiar with the program. The minimum investment is $10,000.
Importantly, when you invest in a demand note, you are trading higher yield for lower diversification.
“Most of our investors we talk to say it’s not about diversification for them; they have that in their investment portfolio,” says Chad Bowles, demand note program manager at Mercedes-Benz Financial. “It’s really about filling a void, replacing a money market fund, CDs or other instruments for a higher rate of return.”
Money market mutual funds, however, spread their bets widely to minimize risk. They tend to hold a mix of short-term debt and other assets from the US Treasury and other government issuers, banks, financial firms and industrial companies.
Below federal regulations, money market funds generally cannot hold more than 5% of their assets in securities of a single issuer. The typical fund holds about 72 different stocks, according to Morningstar, many of which hold 200 or more.
Debt from a single issuer is therefore not a real substitute for a diversified portfolio.
“This is a private offering, and there is some perceived risk,” Bowles says. “We are paying a higher rate of return to compensate our investors for a few extra steps required in our offering.”
Whether 2.5% is high enough to offset the risk of lending to a single borrower is a personal choice.
Although this interest rate is attractive for a short-term security, you should think carefully about what you want from the money. Are you holding it to generate income? Or to ensure security?
Moving away from diversification may increase your income, but it may reduce your security.
This is because these notes are not money per se; these are very short-term corporate debts. You should therefore pay attention to both the weekly rate and any potential change in the credit quality of the issuer.
Also, keep in mind that market rates have gone up. Fidelity Investments, Charles Schwab and Vanguard Group all offer municipal money market funds yielding the equivalent of around 2% for investors in the highest tax bracket. Marcus, the online consumer bank of the Goldman Sachs group ,
pays 2.2% on one-year CDs.
Another aspect to consider: About half of Mercedes vehicles sold in the United States last year were financed through Mercedes-Benz Financial Services, according to the company. Online, Mercedes dealerships offer financing ranging from around 1.9% to 3.99% and up.
If you borrow from Mercedes at 4% and lend your money at 2.5%, you need a financial advisor even more than you need a car.
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