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Updated on Tuesday, April 30, 2019
In recent years, finding stable, reasonable yield has been difficult for savers. A traditional savings account rarely offers an attractive yield and the bond market has been somewhat anemic in recent years. This is where CNote comes in.
CNote is a company that takes your money and invests it in community development financial institutions (CDFIs). Basically, these lenders issue loans to local governments, nonprofits and businesses owned by minorities and women. CNote invests your money with its partners and offers you a return.
Who should consider CNote
CNote is meant as a savings account or bond market alternative. It’s not designed to offer inflation-beating potential returns like those seen in the stock market. Instead, it’s more likely to be appropriate for savers who are frustrated with their current yields and want a relatively stable way to boost what they’re earning each year.
Additionally, the social impact aspect of CNote could make it attractive to those looking for socially conscious ways to put their money to work. CNote’s CDFI partners invest in small businesses and community development projects, so for those who like the idea of doing good while their money earns interest, this can be an option.
However, CNote comes with limited liquidity. There are only four times a year that CNote allows for withdrawals (with 30 days’ notice), and at those times you’re limited to withdrawals of $20,000 or 10% of your balance, whichever is higher. (CNote does consider special circumstances and may allow larger or unscheduled withdrawals at their discretion.)
Those who need access to their money for goals in the medium term (four to seven years out) could benefit from CNote, but withdrawals require planning. As a result, it likely doesn’t make sense to use CNote as an emergency fund where immediate liquidity is needed.
CNote fees and features
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Strengths of CNote
CNote offers an interesting twist on social investing with the expectation of relatively stable returns.
- Yield that beats traditional savings accounts: One of the stand-out features is CNote’s advertised return of 2.75% APY (or more). This is much better than most traditional savings accounts. In fact, as of this writing, CNote offers returns higher than the five-year Treasury yield. That means you could see a higher yield for medium-term savings than what’s available with other savings options.
- No fees: CNote doesn’t charge any fees. Instead, the service makes money on the difference between what they pay you in yield and what they receive from investments made with CDFI partners.
- Social impact investing: If doing good is important to you, CNote offers a way for you to do that. Your money goes toward helping provide affordable financing to underserved communities for projects like affordable housing, community development and minority-owned businesses.
- Trust and business accounts: You can open a CNote account as part of a trust or use it for business purposes. Depending on your needs, this can be helpful in your asset management plan.
The service is fairly straightforward and comes with no costs, but it has the potential to help you earn a higher yield on money that might otherwise be sitting in a low-yield savings account.
Drawbacks of CNote
While CNote offers an innovative way to maintain a stable yield, there are some issues that you need to be aware of before you invest.
- Limited liquidity: This isn’t a deposit account and your money doesn’t remain immediately accessible to you. CNote isn’t simply holding your money; instead, it’s investing your money with its partners. As a result, you need to provide advance notice before withdrawing your money — and you can only withdraw at certain times during the year.
- Yield is still too low for long-term wealth building: Even though the yield is higher than a traditional savings account, it’s still not high enough for effective long-term wealth-building. If you’re looking for a way to build your nest egg, consider Stocks, Mutual funds and ETFs.
- No tax-advantaged options: CNote doesn’t offer you the opportunity to invest with tax advantages. There aren’t IRA or 529 options.
If you decide to use CNote, it’s important to understand how you want to use it in your overall portfolio, since there are limitations to when you can access to your money and limited usefulness as a long-term investment vehicle.
Is CNote safe?
It’s important to note that CNote isn’t a depository institution and it isn’t protected by the FDIC. That means if CNote fails, there’s no guarantee you’ll get your money back. However, the loans made by its CDFI partners to community and municipal projects are generally considered low-risk with stable returns, on par with high-quality Bonds. Most of the projects funded by CDFIs are usually vetted heavily and CDFIs impose their own requirements on borrowers.
CNote also uses what it calls Triple Protection to limit potential losses. Because CNote isn’t a holding company, they don’t keep your money; instead, it goes to CNote’s CDFI partners. CNote only contracts with partners that use government-guaranteed programs, which offer a layer of protection. CNote’s partners are also contractually obligated to repay the loans they receive from CNote, even if something goes wrong. Finally, CNote has a loan loss reserve to help cover potential losses.
However, like any investment, there is still a risk, and you could lose capital in addition to missing out on returns.
If you’re interested in boosting your yield on a chunk of capital that isn’t doing much, CNote could be an interesting place to park your cash. The returns could be fairly stable and may beat what you’ll get at with a savings account. Plus, you get the added bonus of feeling good about making a positive social impact.
However, you do need to be aware of the liquidity limitations and understand that pre-planning is needed before you access the money you invest using CNote.