Finance companies still offering Hanover-style returns

Finance companies are still offering high interest rates, despite a string of failures in the sector leaving $3.3 billion owed to investors.

Last week, the Weekend Herald's table of finance companies showed Hanover Finance was offering investors a year deposit rate of 10.05 per cent and a three-year deposit rate of 10.80 per cent.

Hanover then became the 25th finance company to crash when it froze repayments on $544 million of investors' funds on Wednesday.

The latest figures released by interest.co.nz show a further 10 finance companies are offering term deposit rates of 10 to 13 per cent.

Sharebroker Chris Lee, managing director of Projects Resources, said there were some high-risk companies still lending and "it just doesn't make sense to put your money there".

But he said it was difficult to pull all finance companies under one umbrella.

"The sad thing is the public may end up dragging money out of perfectly good companies for no reason at all other than emotion."

Failed finance companies had either performed "rotten" business, or had fallen under the model of lending long-term and borrowing short-term, he said.

Bernard Hickey of website interest.co.nz said risky finance companies were not offering high enough returns to justify the investment.

This came down to a "chicken and egg" situation: risky finance companies were reluctant to offer high interest rates because investors would think it must be too risky and would put their money elsewhere, Mr Hickey said.

Mr Lee agreed and said an investor putting money into a low-rated company offering 12 per cent interest took a significant risk.

"If you can get 8 per cent from the banks and 10 from a good finance company with a proper credit rating, then a company with not as high a rating should be rewarding investors with a much higher rate."

Only four New Zealand finance companies sport a credit rating: UDC Finance, Marac Finance, South Canterbury Finance and Equitable Mortgages.

A credit rating is a formal assessment by an independent credit rating firm where analysts investigate the company, assess the strength of its balance sheet and give it a rating.

The Government intends introducing legislation that will make credit rating necessary for finance companies. Until then, investors will have to do their own research.

The only problem, according to Mr Lee, is that financial literacy is generally low in New Zealand - many investors do not understand credit ratings or the jargon in investment statements, are guided by television advertising and attracted by media personalities.

He said the market was the worst he had seen it in his 30-year career and his greatest advice to investors was never to put more than 10 per cent of their money into a company.