Make sure you are aware of the risks before investing in a finance company
A An independent opinion of a company’s ability to meet its financial commitments in full and on time.
Know the risks
What are the risks?
Many term investments are extremely safe – they will pay you what they promise. But some won’t. How do you tell?
See Government guarantees for more information.
It’s all a matter of working out the risk and choosing the level at which you feel comfortable. This sounds difficult but you make decisions about risk all the time. You need to take exactly the same approach to term investments.
Finance companies
Finance companies can offer high rates of investment return. But there are a number of risks to consider. Make sure you understand the risks hidden in the fine print.
Risks to watch for include:
- The quality of your security
The soundness of the company's loans is the security for your investment. - Interest rate
The investment interest rate tells you the level of risk involved. - Related-party lending
Be cautious about finance companies that do a lot of related-party lending. - Levels of bad debt
The company has doubts about the quality of these parts of its assets.
Banks, building societies and credit unions
The biggest risk when investing in a bank, building society or credit union is the risk of default – this means you won’t get back your term deposit when the set time period is up. However, this risk is relatively low for these types of institutions.
- Banks are governed and regulated under supervision from the Reserve Bank of New Zealand and all banks in New Zealand are required to have an internationally recognised credit ratingA
- Building societies are not-for-profit organisations that offer full banking services to their members. They are registered under the Building Societies Act 1965.
- Credit unions are financial cooperatives that encourage the financial well-being of members. They are registered under the Friendly Societies and Credit Unions Act 1982.
Building societies and credit unions are regulated by an independent trustee company.
Important
Like you, we can't predict the future - which means we can't guarantee the performance of any company or investment. Consumer NZ does not endorse any specific company, scheme or investment. ConsumerSaver is a good starting point - but, before you commit, we strongly suggest you seek independent financial advice. See our full disclaimer.
