When considering where to invest a small sum, one largely overlooked avenue is the consumer finance company. These companies pay small dividends on investments of usually $100 or more, and they come up for renewal on a six-month or annual basis.
Two major types of finance companies are consumer finance companies and sales finance companies. The former for the most part make small loans and the latter finance retail sales made on the installment plan, such as automobile and refrigerator time sales.
In the early part of 1961 one finance company was advertising regularly in the Wall Street Journal. It called its offering to the public "Thrift Notes." The prospective investor could write in to the head office of the company and secure a financial statement on the company together with an application blank to fill in and return to the company together with his check to purchase thrift notes. Any sum of $100 or more could be invested.
The company, upon receipt of the check, made out a thrift note, which resembles a bond or share of stock. This note is returned to the investor as evidence of the $100 invested. It stated that the thrift note was for a term of six months and the interest rate was 6 percent per annum. At the end of six months the company repaid the $100 with interest for one-half year$3.00.
If the depositor chose to leave his money in, the company would keep both principal and interest. At the end of the next six months, his 3 percent interest was based on $103his original investment plus the $3 earned for the first six months.
If the investor wanted to get his money out after one month and did not want to leave it in for the entire six months he could do this, and he would receive one month's worth of interestone-half of 1 percent$.50. In this respect the deposit or thrift note is very much the same as the deposit in a building and loan association, which has the option of holding funds for a period of time if it is not convenient to permit withdrawals.
But, whereas the thrift notes of this finance company were issued for a period of six months and withdrawals on demand might be permitted, the building and loan association deposits are demand investments with the option on the part of the association to hold up repayment for a period of time.
Another difference is that the thrift notes are a fixed obligation of the finance company to pay both interest and principal, and that if either one is defaulted on, bankruptcy can follow. Deposits in building and loan associations are really the purchase of shares in the association. The association has no obligation to pay a fixed rate of interest. In fact it is not interest at all but a dividend, and it can be changed any time by the board of directors of the association. This change is made from time to time by the board, either up or down.
Although it would seem obvious, the point should be mentioned here that the federal building and loan associations are government insured up to $10,000 per account, while the finance companies are not.
If you have a small sum to invest and are looking for a reasonable return in a fairly safe investment, a finance company could be the way to go.