You Can Get Better Rates

Savers constantly fight the threat of lower interest rates. While borrowers rejoice at the prospect of lower costs for credit, savers have to reconcile themselves to either earning less interest or taking more risk to maintain their income level.

Traditionally, conservative savers have looked to banks to hold their savings. They take comfort in the FDIC insurance that protects their nest eggs. No matter how an FDIC-insured bank uses their deposits, customers will get up to $100,000 of their money back -- even if the bank goes belly-up.

Going beyond the bank
Now, however, banks aren't the only game in town. Some non-bank companies are offering accounts that act exactly like bank savings accounts. Compared to some banks, they offer extremely competitive rates.

For instance, Ford's (NYSE: F  ) Interest Advantage program accepts investments as small as $1,000, paying interest rates that are well above those offered by banks. Depending on how much you invest, compound yields range from 5.39% to 5.70%.

Similarly, GMAC Financial, a division of General Motors (NYSE: GM  ) , offers demand notes to investors. Currently, it pays 6% interest. In contrast, short-term Treasury bills currently pay less than 4%, and your local bank might pay even less on a savings account. Even bank CD rates are falling in response to the Federal Reserve's latest cut in the federal funds rate.

Going uninsured
The big difference between these programs and keeping your savings in banks is that your money isn't insured by the FDIC. Essentially, if you open an account with Ford or GM, you're making a direct investment in the company that puts you among the ranks of corporate bondholders and other creditors in those companies. And with both companies rated below investment grade, there's a real risk that you'll lose every penny if something happens to them that leaves them unable to pay their debts.

Of course, the higher rates are intended to compensate you for that default risk. For the moment, however, that extra interest doesn't amount to much. For example, the bank division of Countrywide Financial (NYSE: CFC  ) is paying 5.5% on its insured online savings account. No matter what you think of Countrywide's prospects in its mortgage business, the FDIC backs up $100,000 of your savings with its bank.

So is it worth it to risk your entire account balance to squeeze out an extra fraction of a percent in interest? Unless you can be absolutely certain that Ford or GM will make good on their debts, the answer is no. And even if you're willing to take on that risk, you deserve more than what either company is paying you in return.

You can learn more about saving by reading about:

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 539496, ~/Articles/ArticleHandler.aspx, 10/24/2016 3:14:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

6/30/2008 4:03 PM
CFC $4.25 Down +0.00 +0.00%
F $12.02 Up +0.05 +0.42%
Ford CAPS Rating: ****
GM $32.04 Up +0.29 +0.91%
General Motors CAPS Rating: ***