The headline-grabbing interest rates offered by finance companies can make their investments seem attractive. "A figure this good should be in Sports Illustrated" claims one finance company.
This is just hype to distract you from the real issue - the soundness of the investment.
What the interest rate is really telling you is the level of risk involved in the investment. Usually the higher the interest rate, the higher the risk.
Take the example of a bank investment returning 6 percent a year and a finance company offering 9 percent for the same term.
Securities Commission Chair Jane Diplock says: "People should realise that an extra 3 percent return is a 50 percent increase in interest and so must represent at least a 50 percent increase in risk."
Pay attention to the margin between finance company and bank interest rates - the finance companies we surveyed were offering rates that on average were 3 percent higher than bank rates.
A new twist is for finance companies to offer interest rates that are closer to bank rates, to make their investments seem less risky. You'll need to weigh up the interest rate against the other information from the prospectus before you can get a real picture of the investment.
Our tip
Never rely on the interest rate alone - whether it's high or low.
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