What it is

LC stands for Letter of Exchange — a fixed‑income security issued by finance companies, not by banks.

It works exactly like a certificate of deposit (CD): you lend money to the institution for a set term and it pays you back with interest. The difference is who is doing the borrowing.

Careful with the name: these are three different things

This is where almost everyone gets lost, and the naming does not help:

AcronymWhat it is
LCLetter of Exchange. Issued by a finance company. Income tax applies
LCI / LCATax‑exempt bank notes for real estate and agribusiness. Issued by banks and exempt from income tax for individuals — see tax‑exempt bank notes
Letter of creditA trade‑finance instrument where a bank guarantees payment between a buyer and a seller. Nothing to do with investing

Despite “exchange” in the name, an LC has no connection to foreign currency. The term is historical.

How it works

  • You pick an LC with a defined term and rate (for example, 115% of the interbank rate benchmark)
  • The money stays invested until maturity — many LCs do not allow early withdrawal
  • At maturity you receive the principal plus interest, with tax already deducted

It pays more than a CD, and there is a reason

LCs usually offer better rates than CDs from large banks. That is not generosity: it is the price of risk. Finance companies are smaller institutions with less access to cheap funding, so they pay more to raise money.

What levels the field is the deposit guarantee fund: if the issuer fails, the fund returns your money up to the guaranteed limit, per taxpayer and per institution — the same cover a CD gets.

Tax

An LC follows the same regressive income tax table as a CD: the longer the money stays invested, the lower the rate. It is not exempt — LCI/LCA are the exempt ones, which is exactly why mixing the two up costs money when you compare them.

Risks

  • Credit risk: the issuer can fail. The guarantee fund covers up to its limit; above that, you depend on the institution
  • Liquidity risk: if the LC has no early withdrawal, the money is locked until maturity. It is not suitable for an emergency fund — see liquidity
  • Concentration: the guarantee is per institution, so putting everything in one leaves the excess uncovered

Before investing

  • Confirm whether it is an LC or a tax‑exempt bank note. The tax exemption changes the final result
  • Check for a lock‑up period. With no early withdrawal, the term is a commitment, not a suggestion
  • Add up what you already hold at the same institution so you stay under the guarantee limit
  • Compare net, not gross: 115% of the benchmark with tax can end up below an exempt option paying less