Archive for March, 2011

Are diesel cars “worth it”

Having recently purchased a new diesel car, I am often asked “is it worth it”.  The question is based on some combination of three basic presumptions.   First, it is presumed that diesel cars cost more when compared to traditional gasoline automobiles.  Second, it is presumed that diesel fuel costs more than traditional unleaded gasoline. Finally, it is presumed that diesel cars in some way under perform gasoline automobiles. Thus the question is really: “Given the presumed problems with diesel cars, are they worth it?”

The short answer, for those that want to skip the article below, is Yes – at least in my opinion.   But please read on to understand why.

This post is based on my recent experience with the new BMW 335d.  Of course buying a BMW is not exactly a thrifty thing to do… but I assure you it was within my means.  Besides, if you can’t spend the money you save on things you want every now and again, what’s the point?  Anyway, I purchased a new 2011 BMW 335d in the fall of 2010.  I made my decision based on the premise that gasoline prices were sure to continue to rise (You can’t print trillions of dollars and not have the price of commodities not go up) and that by burning fuel more efficiently I would be not only saving some money, I would also be “helping the environment”.  That and my wife said I was too young for a 5 series.

Here is how things have broken down.

First, the 335d actually cost me about 10% less (~$4k) than a similarly equipped 335i.  Despite the fact that the 335d has a base MSRP of $2k more than the 335i.  This was the case for several reasons:

  • BMW provides a $2500 to $4500 “eco-credit” depending on the month (In my case I got $3500).
  • BMW provides generous finance between 0.9% and 4.9% (In my case I got 0.9% for 3 years and yes sometimes debt is “ok”)
  • The government provides a $900 Tax Credit for the purchase of a certain fuel-efficient vehicles.
  • I was able to get a very good deal by using the “Internet sales” division of several dealerships.

Worth It #1 – At least in my case, the diesel car actually cost less.

Second, while diesel fuel does cost more than unleaded, it doesn’t cost that much more.  Where I live at last check, a gallon of diesel goes for $4.05 while a gallon of premium unleaded (required by the 335i) goes for $3.99.  So the gas is indeed a full 2% more expensive and it is 8% more expensive than regular unleaded at $3.79.

But based on my driving experience for the last 2500 miles, I am getting an average of 31.3MPG with my car.  BMW advertises the 335d as getting 23MPG city and 36MPG highway… I am seeing about that.  If you assume a 50/50 mix this averages to 29.5MPG.  The 335i on the other hand is advertised as getting 17MPG city and 28MPG highway or assuming a 50/50 mix an average of 22.5MPG.  If we give the 335i the same mix as me, this would mean an average of ~24MPG.

This means that based on BMW’s numbers and some of my own experiences the 335d gets about 24% better gas mileage.  It doesn’t take a math wizard to see that if the fuel only costs 2% more and you get 24% more bang for the buck it the diesel is the way to go.  Base on my driving, this means I will save approximately $190 a year in fuel costs.

 

Worth It #1 – At least in my case, the diesel fuel actually cost less.

Finally, what do you sacrifice by getting a diesel?  Fortunately, the days of the old smoke bellowing diesels have long since past.  Today’s new “clean diesels” burn clean with no perceptible smoke from the tail pipe.  But the reality is that it depends on the diesel.  In the case of the 335i vs. 335d you do give up some 0-60 time (5.6s vs. 6.0s) so if I gun it of the line, it takes me an extra 4/10ths of a second to get there.  The 335d is also a little heavier (~250lb), so I imagine the handling may slightly hindered.  I will say the car is a BMW and with the M-suspension package I have not noticed any handling problems.  The one place the 335d spanks the 335i is in torque (125 pound-feet more than the 335i).  I find that this is most noticeable in the 60 to 80 range, where the car is a real sprinter.  The only other thing I will say I noticed was an occasional “burning” odor for the first 1500 miles or so, but that has now gone away… I have read this is normal as the car “burns in”.  No idea if this is related to it being new or a diesel.  So when it comes to sacrifices I don’t really see any.

Worth It #1 – At least in my case, the diesel performs just as well as a non-diesel so we can call this a wash.

Of course you don’t need to buy a new car to save on fuel costs.  Consider these tips instead.

Cheers,

This posting is provided “AS IS” with no warranties, and confers no rights.

Living Below Your Means – Illustrated

The number one search hit I get for this site is “how to live below your means”.  I intend to address this directly through a series of future posts, but for now I wanted to illustrate the concept.  The idea is really very simple as Steve Martin explains here on SNL.  The truth though is that it is often easier said than done to actually do.  There are several reasons for this:

  • Living below your means is a lot easier if you have always done it and never gotten in to debt.  Once you have lived beyond your means, the road back is a hard one.  It’s not impossible, it simply requires more sacrifice.
  • We want too much stuff.  We as humans, need very little, but we as Americans have been taught to want a lot.  IMO, want in and of itself is actually a good thing, it is what drives us to greatness.  However fulfilling the want immediately before it has been earned (IE: going into debt) is a simply road into slavery.

More on all of this later.  For now, I present the following three illustrations:

First, we illustrate the simple concept of living below your means.

Second, that the gap between what you earn and what you spend is where this “so called saved money” comes from.  In the long run, saving and investment of capital is the only true path to prosperity.

Finally, this illustration shows that if spend more than you make your are probably doing the “live below your means” thing incorrectly.

That’s it for now.

Cheers,

This posting is provided “AS IS” with no warranties, and confers no rights.

Prosper.com Results for 2010 and 2011

I recently posted my results from Prosper.com which hold micro loans from 2009, 2010 and 2011.  I also posted a bunch of links on Prosper.com I had found interesting.  Based on feedback from a commenter, here is a more recent list of links:

  • Prosper.com Official comments on 2006 loans (January 2010) – Basically an open letter on Prosper’s blog that argues against The Big Money article on Prosper.com that claims “39% to 54%” losses.  This has a great chart that shows the drastic improvements in loans originating in Q3 2009 (which is about when I got started).
  • Prosper.com Comments from Report Your Complaint.com (June 2010) – Not a happy customer and the commenter’s are pretty negative as well.  No comment though on the years and types of loans they were investing in.  I will note, I have a feeling a lot of people invested heavily in C, D and E loans.
  • Prosper.com Boasts of Lower Loan Loss Rates (September. 2010) – Summary of a press release and results in the next bullet.
  • Prosper.com actual results (all loans) from July 2009 to June 2010 – (June 2010) – This is a really good breakdown and essentially shows an average return of 10.43% (almost exactly what I am seeing on my portfolio).
  • Prosper.com Results for 2007-2010 loans (Nov. 2010) – This person posted his full term results for loans originating in 2007 and reinvested through 2010.  He only saw a return of about 1%.  However I will note, he didn’t diversify enough IMO (investing 5% of his capital into each loan) and he focused too heavily on lower quality borrowers with 30% invested in E or lower and 45% in A or higher.
  • Prosper.org – Prosper.com / LendingClub.com Forum and Community (Active) – Ran across this, looks like a really good community, wiki and more.  The forum has a recent post with people providing their ROI, if you want recent results you are looking for “post quiet period results” (June 2009).  Here are two I found: 15.8%, 8.43%.  Results with an average age of 300-400 days will show you loans originating in 2009 after the quiet period. On portfolios with average ages of 800-1000 days you will see the returns are much lower, usually 1-4%
  • LendStats.com (Current) – Probably the single best place for real-time up-to-date stats on most P2P lending sites.

After looking at more recent results and figures, I think it is obvious that loan quality definitely improved after June of 2009 quiet period and re-launch.  Of course so did the overall economy.  Finally, it is very important to diversify your portfolio.  Since I started with an initial $2000 investment, I have never invested more than 2% of my total portfolio in any one loan.  Most of the reviews I have read are from people that are investing 5%, 10% even 20% of their capital in individual loans and they are upset with poor results.  This is just nuts.  With 5-20% of your capital in a single loan, one or two defaults can wipe out all the interest you have gotten and one or two more can give you negative returns.  My advice, if you are only going to invest $1000 or $2000, limit yourself to NO MORE than $25 per loan; no matter the score.  A big mistake is to say put $25 in a bunch of E loans and then $100 in a AA loan thinking it is “safe”.  You could get lucky, but the interest in the AA loan won’t offset the losses in the E loans and if the AA loan defaults your screwed.

Cheers,

invest, investor, investing, lending

This posting is provided “AS IS” with no warranties, and confers no rights.

Prosper.com – Good links to read

Having recently gotten more active in Prosper.com and blogging about it here and here, I wanted to do some digging around the web and see what others are saying.  The following are some of the better articles I have read:

  • Why Prosper.com will fail (June 2006) – Obviously, 5 years later Prosper has not failed, but its an interest read.
  • Why Prosper.com will succeed (June 2006) – Written by the same guy as above, another good read.
  • Wikipedia (Current) – The section on “Cash position and going concern status” is particularly interesting.  Long story short, Prosper is operating at a loss and plans to raise additional funding.  This is definately should be a concern to lenders.  This of course is one of the risks I raised in my previous post.
  • Prosper Blog note on the sale of bad loans (May 2008)
  • Google Chrome Extension for Prosper.com (January 2011) – I found this interesting.
  • Prosper.com Review Circa 2007 (March 2007) – One thing I have seen time and time again is that the overall quality of Prosper.com results have improved in recent years.  If you were a lender in 2006, 2007 or 2008 you probably lost money or broke even.  More recent loans seem to be doing better.  Of course all hell was breaking loose in 2007-2008 in the world of finance.  Time will tell if my 2009-2011 loans perform better.
  • Lending Club Review (Sept. 2010) – It is interesting to read how others are doing on Lending Club.  This post covers tips on loans to avoid.

Cheers,

When is 3.99% not 3.99%?

When its actually 7.8% of course!  As a follow-up to my previous post on 0% balance transfers.  I figured I would at a deeper look at the other side of the offer: 3.99% for 18 months.  Now, if you are transfering a balance from a credit card that is at 29% interest, 3.99% sounds like a sweet deal.  But before you get too excited you need to read the fine print and understand how the transfer works.

For this example, lets assume we transfer $6500 to the new card and we plan to pay the balance off entirely during the promotional 18 month period.  You might the payment and interest schedule to look like this:

 

Unfortunately, that isn’t how it works.  This is because the 3% transfer fee is applied on the “transaction date” so your starting balance is actually $6500 x 1.03 or $6695.  This is a fee of $195 that is financed along with the rest of the balance at the 3.99% rate.  So not only do you pay interest on the balance, but you are charged a transfer fee and you have to pay interest on the fee.  The result is that you will pay an additional $8 in interest over those 18 months and your total payments above your original balance will be $213.37 in interest and $195 in fees, or a total of $408.37.  Plus, to pay off the balance in 18 months your monthly payment has to be $384 instead of $373 or $11 extra a month.

When you take these factors into account, the transfer (assuming you pay it off entirely in the 18 month period) is effectively being financed at an 7.8% interest rate.

The question is, is transfering the balance a good deal?  I believe the answer is “yes with an if”.  Yes, if:

  • You are transfering from a card with an interest rate of greater than 7.8%
  • You pay off the entire balance within 18 months
  • You are never late on the payments (if so, they jack up everything and the savings are gone in a flash)

Here is the full breakdown with fees:

Cheers,

This posting is provided “AS IS” with no warranties, and confers no rights.

When is 0% APR not 0% APR?

Why when its 6% annualized of course.  I just got this offer in the mail the other day:

As you can see, they are offering me zero present interest on all balance transfers, through October 2011. This basically equates to 0% for 6 months. Unfortunately, just a few sentences later you find that:

“Keep in mind these offers include a transaction fee of either $5 or 3% of the amount of each transaction, which ever is greater.”

While it was nice of them to not have this detail the small print, this 3% for 6 month period is effectively 6% on an annualized basis.  So either way, its not such a great deal.  If you are transferring the max of $6,350 you are going to pay at least $190.50 in transfer fees.  This amount of course is instantly added to your balance, so if you don’t pay it off the entire balance by the end of 6 months, you pay interest on the that $190.50 along with the rest of your balance.

Of course, this might actually be a good choice if you are on some other higher interest credit card paying 29% in interest.  However, unless you pay it off quickly (6 months) the rate goes right back up to 13.25% (in my example).  You could alternatively use the 3.99% offer for 18 months, but you still then have to pay the 3% transfer fee.  Finally, and the wording is confusing, it appears they start charging interest at the 13.25% “on the transaction date”, so unless it is all paid off within 6 months or 18 months, you are paying both the 3% fee, but also the 14% on both the transferred amount and the 3% fee. 

It is frustrating to me, how once you get in the debt trap there are a million-and-one fees and tricks designed to keep you there.  I like to follow the “Don’t buy stuff you cannot afford plan” and avoid this nonsense altogether.

Cheers,

Prosper.com Continued – Can you earn a living using Prosper.com?

I noticed that several people found my last post by searching for “Can you earn a living using Prosper.com”.  I didn’t exactly answer this question in my last post and thought I would give it a go.

The answer isn’t really Prosper.com specific, as much as it is a question of what income you need to live on and what rate of return you can get?  Prosper certainly provides the opportunity for you to earn rates of 5 to 30%, but the default rates increase as the rates and credit worthiness of the borrowers go down.  If I were to truly try to live off the interested earned via Prosper, I would be conservative and plan on getting only a 9% return using a well diversified portfolio of loans.

Before we start, let me explain the basic mechanics of how this works:

  1. You need up front capital to invest.
  2. You loan the money out for 1,3 or 5 years.
  3. The borrower pays you your principal and interest monthly, with the the interest front loaded like any standard loan.
  4. The money is deposited into your Prosper.com account.  If you needed this money to live on, you would have to withdrawal funds monthly.

Now, let us breakdown the numbers and see if we could actually earn a modest living using Prosper.com only.

Let’s assume the following:

  • You have a $250k nest egg to invest
  • You invest in a well diversified portfolio of loans that average 9% return (including defaults)
  • You invest all the money up front on day one (hard to do by the way)
  • All loans are for 3 years
  • Monthly you leave the principal in your account and only withdrawal the interest to live on – thus “earning a living”

In this case, you would roughly earn the following in interest:

  • Year 1 – $19,416 in interest
  • Year 2 – $12,289 in interest
  • Year 3 – $4,492 in interest

Obviously, even if you lived a modest life and had your car and home paid off, trying to live on an average of $12,000 a year would be a bit tight.  If we up the initial investment to $500k we get the following:

  • Year 1 – $38,833 in interest
  • Year 2 – $24,577 in interest
  • Year 3 – $8,985 in interest 

This is clearly better and yields you an average income of $24,000 a year.  Of course after taxes you would only end up with about $20k.

In both scenarios, we have not spent our original investment.  This is key, because that is the capital on which you will want to re-invest to sustain your earnings into the future.

If this is truly going to be your only source of income, you will probably want to reinvest the principal each month.  This effectively makes you on the lending end of an interest only loan, as the principal is continually re-loaned back out using the same 9% return / 3 year / full diversified plan.  Theoretically this means that your interest earnings will not drop over time and instead will remain consistent.  The results would then be:

  • $250k starting investment
    • Year 1 – $22,500 in interest
    • Year 2 – $22,500 in interest
    • Year 3 – $22,500 in interest
  • $500k starting investment
    • Year 1 – $45,000 in interest
    • Year 2 – $45,000 in interest
    • Year 3 – $45,000 in interest

This brings us into the range of a salary one could more comfortably live on.

While that seems all fine and dandy, there are most definitely risks.  Here are just some of them:

  1. This assumes you have $250k or $500k just sitting around and you can make the initial investment
  2. Putting all your eggs in one basket (Prosper.com) is a risk in and of it itself.  Prosper.com could go under, be forced to restructure, who knows.
  3. The economy could go in the tank and loan defaults could spike.  This happened to Prosper back in 2006 with large amounts of loans going into default.  The result was that on average you might only see returns of 4% or potentially even slightly negative.  If this is your only source of income you would find yourself in a tough spot.
  4. Interest rates may drop in the future.  Prosper interest rates have dropped at least once since I have been using the service.  So your future returns may not be as good as 9%.
  5. Each month you will need to reinvest approximately $6k or $12k into new loans.  There is a very real risk that there may not be enough borrowers with the terms, rates and credit scores you need to maintain your 9% average rate, level of default and diversification requirements.  If you are not able to fully reinvest into an ideal new set of loans, you will see slippage in your monthly income.
  6. Add to these risks, all the other risks I listed in my previous post.

In closing, I think the answer is “yes you can earn a living using Prosper.com” – but this is based on a number of risks and a large number of assumptions.  It is nice that the rates of return of Prosper would at least allow you to entertain the idea of earning a living, with banks only offer 1-3% for 1 to 7 year CDs, earning a similar amount of interest to live on would require a signifcantly large amount of initial capital (Think $2M+).

Cheers,

NOTICE: This article is not to be construed as investment advice. Past performance is not necessarily an indicator of future returns. Investing in Prosper.com may result in the loss money.    This information is provided “AS IS”, without warranty and confers no rights.