What are Toyota IncomeDriver Notes?

Have you heard of Toyota IncomeDriver Notes?

I was told about these notes by a reader, Rich, and I found that concept fascinating.

I just got an email today from Toyota offering “Income Driver Notes”. 3.25% variable rate investment with as low as $500 deposit. With the rising interest rate environment, even places like Toyota financing are getting in on the gig. Maybe this is a topic for a new newsletter? Want me to forward the note to you?

You know how when you buy a car, the dealership tries to get you to use their financing? The rates are not going to be better than your local credit union or even a commercial bank. But they push it because the commissions are higher.

Do you know where the financing arm of the manufacturer gets the money? A variety of places but one of the sources is investors – folks like you and me.

What are IncomeDriver Notes?

The full name of these notes is “The Toyota Motor Credit Corporation Variable Denomination Floating Rate Demand Notes” and they are a way for investors to invest directly in senior notes issued by Toyota Motor Credit Corporation (TMCC). According to the prospectus, these notes have no stated maturity and subject to repayment at investor’s demand at any time. TMCC can also redeem them at any time.

The notes have a floating rate, which means it can change. As of this writing, they are offering 4.00% APY but just like a savings account, that can go up or down. The minimum initial investment is $500.

These notes are NOT FDIC insured. They’re not a bank deposit.

What Are You Investing In?

You are, in effect, lending money to Toyota Motor Credit Corporation. I assume they will lend that out to folks who need auto financing and earn the different in interest they collect and what they pay to you.

Your risk is that TMCC goes under and you join a list of creditors. Given that TMCC’s overall credit rating is A+ according to Fitch (as of November 2021), I suspect this risk is relatively low but it’s certainly a risk.

And remember, these are unsecured notes. The money may ultimately go to financing a car but these notes are not secured by anything other than the TMCC’s credit.

What Other Auto Financing Companies Offer This?

Quite a few!

This falls into the category of “car demand notes” and they were appealing when interest rates were lower. They offered a slightly higher yield than bonds and savings accounts.

Here are the ones I know about (rates are as of 12/27/2022):

• GM Financial Right Notes – 4.50% APY with a $500 minimum
• Mercedes-Benz Financial Services First Class Demand Notes – 4.00% with a $10,000 minimum to avoid a $5/mo fee
• Caterpillar PowerInvestment – 2.90% to 3.05% with no minimum. A higher rate with a higher principal.
• Dominion Energy Reliability Investment – 3.75% to 4.25% with no minimum. A higher rate with a higher principal.
• Duke Energy PremierNotes – 4.05% to 4.25% with $1000 minimum. A higher rate with a higher principal.

Are IncomeDriver Notes a Good Idea?

Right now? Not really.

Interest rates on savings accounts and certificates of deposit are going up as the Federal Reserve increases rates. We are seeing no penalty CD rates that are higher than the current rate of IncomeDriver Notes.

If you can lock up your cash for a while, you can beat these rates handsomely with a Series I bond with a current rate of 6.89% APY! (but you are locked in for a year and will pay 3-months interest as a penalty if you withdraw in under 5 years)

There is a small non-zero risk that TMCC could go bankrupt and you’ll have to deal with that process if you want your money bank. There’s no risk of that when you go with a bank or the United States Government.

Right now, the rates aren’t appealing enough for this to be a good investment.

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