Frugal Motoring – The PCP black hole

Sadly not an angel dust-fuelled night club.

Once upon a time you walked into greasy Tony’s car dealership, slapped down your hard saved cash, and walked out with a creaky Lada/ British Leyland motor with build quality as questionable as Katie Hopkins.

Now we walk into a car megamart warehouse to be met by bright young things in shiny suits and pleather brogues. If we feel we are worth it we walk into glass prisms of monochrome and steel to be fed posh coffee by bright young things in shiny suits and pleather brogues who tell us we are definitely worth it, sir.

The world of buying a car has changed a lot, and numerous products now cater to whim and desire to self-indulge. The current petrol on the bonfire of consumer car culture is PCP, or Personal Contract Purchase, sometimes confused with Personal Contract Leasinging which is a more traditional rental option.

What is PCP?

A very clever tool to sell cars.

PCP is essentially a loan on the depreciation on a car you ‘buy’. You don’t really own the car despite assurances to the contrary (although this is a whole other thorny area). You pay a deposit, then a monthly payment on the loan that finances the value the car loses in your use, then hand it back to the finance company at the end or buy it off them. Money Saving Expert says it better than I can (1):

It’s one of the more complex financial products available to help you buy a car, but it can be broken down into three main parts:

The deposit (usually around 10% of the car’s price).Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers’ finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you’re buying a new car but only if you take their finance – eg, VW Finance offers £1,000. The larger the deposit, the less you’ll have to borrow.

The amount you borrow. The amount you’ll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you’ve put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs are 4%-7%.

The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It’s agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.

So far so clever, the difference to a more standard agreement such as Hire Purchase being that you are not paying for the whole of the vehicle, just the depreciation. Therefore the monthly payments are much lower. This, combined with various incentives such as the ‘scrappage scheme’ (hack-spit) have meant that new cars are available to people previously unable to afford them. Often with these contributions and incentives the cost of a new car is lower than a used car for monthly payments. A worked example from Carbuyer (2):

– A new car costs £25,000
– The GMFV after three years is £15,000
– Over three years, you need to cover £10,000
– Subtract the a deposit of £1,000
– You’ll pay the remaining £9,000 over 36 monthly payments of £250

And here’s some examples from major manufacturers websites:

MazdaSmart

As Graham Hill, director at the National Association of Commercial Finance Brokers, says (3):

“Drivers who might have been looking at hire purchase on a second-hand Ford Focus can find themselves paying less on PCP for a brand new BMW 1 Series or a Mercedes A-Class”

Which is where some of the warnings begin.

The cautions

PCP is a complex product often used to sell high value items to people who may not be as financially savvy. As a complex financial product, there are often T&C’s to be aware of. A recent survey by the CarGurus found 9 out of 10 people didn’t understand the small print of their PCP contract (4). Though there are many online guides to PCP, that same survey found although 91% of people thought they had a good grasp of car finance, only 47% knew what PCP meant (4, 5).

Two big stings are the condition the car is returned in, and the agreed mileage limit. The condition is a standard agreement that the car will be returned in good condition ready for sale at the end of the term. This is usually assessed by the finance company, and repairs charged at in-house rates. That parking ding can quickly becomes £hundreds to repair, with limited ability to contest. If you happen to crash the car, or it is seriously damaged, you have to buy out of the deal, usually with a penalty. For servicing, some PCP deals require you use the manufacturer/ sellers in house servicing department, placing you over a barrel.

The agreed mileage limit is another bit of small print worth looking at. In seeking a good GMFV most finance companies set low average mileage limits (5-10k common). Go over that and every additional mile can be charged, typically at 5-10p a mile (5). So that 5k extra a year costs you £500 at 10p/mile, but with some bombsite backstreet dealers charging 30-50p/mile (6). Going back to that CarGurus study, more than half of those surveyed didn’t know what the penalty charges were on their contract (4).

The Canary

Warning sounds are beginning to be made about PCP for two reasons. The first is a flashback to 2008’s grim figure, sub-prime lending. It is unclear how many loans made for PCP in the UK were sub-prime, that is to people who will probably default. The car finance industry states it to be around 3% (7), but given the demographic PCP is aimed at this seems low. Outside of those selling PCP, economists at the BOE have privately expressed concern (8). The sale of sub-prime auto loans in the US is already becoming big business (9).

The BOE’s concerns touch on some of my own. PCP leaves the lenders exposed in many ways. An economic downturn could mean a default on that PCP loan (10). The same economic downturn could knock value of second hand car values and residuals, therefore devaluing the asset. The value is highly dependent on the GFMV.

PCP is often sold as ‘this is the minimum it will be worth at the end, but if it’s worth more then the equity can be used on another car’. The issue I have with this is that values are estimated years in advance, while on the ground prices change with fashion, numbers sold and all the other factors that effect car residuals. If most cars are being bought on PCP, as the people who used to buy the cheap secondhand car now buy a new one on PCP, the demand and value drops off in the secondhand market. We’re already seeing that at the bottom end of the market, with a bumper crop of cheap serviceable vehicles. Additionally a car manufacturer may be the focus of a scandle (say relating to falsified emissions results), which knocks consumer trust and desire for the brand, reducing prices. Ultimately someone will be left holding the difference between the predicted value and the actual value; an overexposed lender or a broke consumer. We are beginning to see this, but the train is still coming down the tracks. Rant over.

The final caution is on the reason people buy PCP deals. Some argue they will save on tax or help the environment compared to their old car (false economies for the most part, and a sad endictment of our broken car tax system). Others want a reliable car that’s in warranty that functions as a white good and can just be used. Here the disconnect is new=reliable, which is a cognitive bias that’s not always the case. More on that another time.

TL:DR

PCP is good if:

  • You read the small print
  • Maintain the car impeccably
  • Do less than the mileage limit
  • Don’t mind an unfashionable, unflashy car
  • You can afford to buy out of the PCP if something untoward happens.

PCP is not as good if:

  • You don’t read the T&C’s
  • You do big mileages and work the car hard
  • You want a flashy fashionable car
  • You can only just about afford it

As with any purchase, a car on PCP is a personal choice. There are risks, but with discipline and sense it can work. Just not my cup of tea.

Next time on Frugal Motoring- Bangernomics

Have a great week,

The Fire Shrink

N.B. If you are looking to buy a car on a PCP deal, check out LingsCars, if only for the WTF moments.

Ling

References:

  1. https://www.moneysavingexpert.com/car-finance/personal-contract-purchase
  2. http://www.carbuyer.co.uk/tips-and-advice/152049/pcp-deals-explained-what-is-pcp-finance
  3. https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://amp.ft.com/content/8bd9da60-0a5d-11e7-ac5a-903b21361b43&ved=2ahUKEwiJ_8Sa6rnbAhXJNcAKHYeaB9kQFjAIegQIARAB&usg=AOvVaw36J7T_jfEnveDLZBnGirde&ampcf=1
  4. http://www.thisismoney.co.uk/money/cars/article-5380867/Britons-oblivious-costs-risks-car-finance-deals.html
  5. https://www.thecarexpert.co.uk/how-to-understand-a-pcp-car-finance-quote/
  6. http://www.thisismoney.co.uk/money/cars/article-5388333/Avoid-mileage-penalties-car-finance-deal.html
  7. https://www.theguardian.com/money/2017/jul/02/car-leasers-publish-sub-prime-lending-figures-mps-charities
  8. https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/
  9. http://www.ifre.com/sub-prime-auto-puts-more-junk-in-trunk/21343681.fullarticle
  10. https://www.theguardian.com/business/2017/jun/10/car-loans-personal-contract-plans-vehicle-financial-crisis-pcp
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Musing on… Mortgages, what’s your risk tolerance?

I’ve recently been thinking a lot about mortgages, because I’m getting a new one. At the same time I’ve been educating myself about investment risk tolerance (1,2). I’ve done lots of online questionnaire’s to evaluate mine, which broadly show I’m willing to tolerate a lot of risk; I’m youngish, can wait most storms out and have a background in a profession where I have to manage risk daily. I also have the capacity to tolerate that risk; I make a good, secure salary and I won’t be investing money I can’t afford to lose. That’s not the case for my mortgage though, the single last purchase/ cost I’ll probably ever make. A post last week on r/UKPersonalFinance got me thinking:

Stick or twist?

Are you mad Shrink? You need to fix, fix, fix, before the rates go up. Everyone says they will: the BBC (3,4), Newspapers (5,6,7,8), lots of blogs (9,10).

Is what everyone was saying when I was looking last week. Except the rates didn’t go up. We had crappier than anticipated economic results, and the BoE said no (11). It cut it’s growth forecast and interest rates remained on hold at 0.5%.

Well they can’t stay that way!

No, they probably won’t. But they could do, pollsters and pundits have been off before. They said Lehman Brothers, Northern Rock etc were too big to fail. They said Brexit wouldn’t happen. Predicting the future is Mystic Meg’s domain.

Carney  
Mark Carney – will the last one out please turn off the lights.

 

Opportunity cost

Four years ago MrsFIREShrink and I were looking at putting our hard-earned deposit down. As 20-something millenials we were pretty unusual to be in that position. We leveraged a 90% LTV on a do-er-upper in the area we both loved, worked and intended on staying in. In those pre-Brexit, pre-May/Corbyn, pre-economic flatline days everything pointed to fixing for as long as we could. 4.29% fixed for 5 years was the best we could manage. That was ok as when we bought we planned to renovate and stay there for 5-10 years.

Fast-forward four years and we’ve moved 150 miles for job opportunities we couldn’t pass up but never anticipated. Our old house is for sale, and we’re trying to port our mortgage to save paying our eye-watering (5%!) exit fee. We’ve learnt that long fixed rates have their downsides (12). We look at others fixing for 10 years, who have no plans to move, and think about their flexibility (13,14).  Going back to those trackers *affix hindsight glasses* had we selected a three year tracker rather than fixing we would have saved thousands in interest. This time we’ve taken information from a number of different sources, and used online calculators to think about our best financial options (15). Cardinal rule learnt: Always consult multiple sources, references and opinions before purchasing.

Where’s the risk?

Why didn’t we go for a tracker 4 years ago? We wanted to minimise our risk to a rising base rate. Despite being tolerant of risk in work and in cash/ stock investments in the past, I’m not for my housing. I started to think about why, and where the risk lay:

  1. LTV – How much you’re willing (or the bank is) to leverage your cash against future earnings.
  2. Monthly repayment figure – How much you’ll be paying back a month, and if you can afford it.

The two are obviously inextricably linked. Our LTV has improved to 80%, which looks to be optimal for interest rate offers. Risks/ costs worth considering:

  • Under-leverage – borrow less, with LTV 60-80%, and pay less on interest due to better rates and lower value. Buy a smaller property, but risk missing out on the extra equity caused by a potential increase in house prices.
  • Over-leverage – borrow more, with LTV 80-95%, and pay more interest due to higher rates. Buy a larger property, put more money in monthly, so more equity in the long run. Greater exposure if there is a house price falls resulting in more negative equity.

The tolerance for this definitely varies amongst my friends and acquaintances. The common theme amongst blogs I’ve read has been to leverage to your max, 90% at least, as long as you have a good duration (25 years+) of work-life human capital left. This seems to be driven by the view that property remains a good long-term investment option. Monevator does an excellent piece on this, although as it’s 2012 it’s a bit out of date (16). Just look at the long term trends below to get the picture:

house-prices

real-house-prices

Anecdotal evidence; I have a close friend who bought on a 85% LTV five years ago. He bought a property in an up-and-coming commuter belt, and the house value increased by about 25% (good on him). He took this and leveraged at 90% LTV on a thumping great Barratt executive home (le sigh), so in his early-30s is sat in a half-million pound house. He’s willing to tolerate the exposure because it’s their dream home and they intend to stay there 10+ years.

Historic Value

Digging a bit deeper into those trends to understand whether now is a good time to go max-LTV is difficult. The question; Have property prices always been a good investment? Could be a whole separate post in itself, but suffice to say it’s difficult to answer. Most property prior to the post-war housing boom was owned by landlords and rented out (are we heading back that way?). The British obsession with owning your own home is a new one. UK house price index data only reliably starts in the 1950s, but this LSE blog looks at land prices going back to 1892 (which helpfully are no longer published) (17).

Cheshire-fig-1

To unpick this data note that the value of the home is made up of the value of the structure and the value of the land combined. This blog by James Gleeson summarises dis-aggregating house price value (18). From it I take this graph:

test2

So, we see that the value of the structure increased slightly once inflation-adjusted, but residual values, i.e. that value of the land, is the source of most of the increase. This is also visible in the price of undeveloped land. Review the historic trends from the former LSE graph and we see that the increase in value is a modern phenomenon, and the long-term investment strategy of property is not so long term.

Short-term LTV Outlook

Again, another whole post in itself. In 2016 the UK Value Investor reckoned that UK house price forecasts weren’t looking good (19). Two years on and the market, as discussed in recent Full English Accompaniments, looks to be stodgy. Back then, UK Value Investor reckoned that house prices were in a bubble and due a crash. This was based on price to earning ratio data:

UK-house-price-chart-2016-11

From UK Value Investor (19)

Here’s a quick description of what that chart shows:

  • The black line – The average house price in each year
  • The red zone – Where the average house price would have been if houses were historically expensive, i.e. if the PE ratio had been between 5.5 and 6
  • The yellow zone – Where the average house price would have been if houses were at historically average valuations, i.e. if the PE ratio was between 3.8 and 4.5
  • The green zone – Where the average house price would have been if houses were cheap, i.e. if the PE ratio had been between 3 and 3.3″

The whole article is worth a read if you haven’t before. John predicts:

Expected capital gains from UK housing are zero over the next ten years

Which two years on looks pretty fair. His assumptions hold that house prices won’t crash, but will stay relatively flat while wages catch up. Worth considering if you’re buying now expecting a 10-20% increase in the value of your holding. Why waffle about this – it nullifies one of the arguments for a 95% LTV.

2. Monthly Repayment Figure

Back to our original list and the monthly repayment figure. A function of mortgage duration, principal sum and interest rate. I’m not going to go into duration so much, as this appears to be more a personal choice and dependent on how much human capital you have left. Opting to pay a short duration means more/ month, a long duration = less. People modulate their monthly repayment on big houses with high LTVs by going longer on their duration. The risk here is about what % of your earnings you’re going to be spending on your mortgage. Lenders set their affordability calculators on earnings, up to 4.5x, but this has got stricter. There have been concerns that borrowers who were previously approved will now struggle to remortgage due to the affordability rules (20, 21, 22).

The traditional model argues to aim for 35% of your pretax income to go on your mortgage, 45% at a push (23). Dave Ramsey advocates a conservative 25% of take-home (24). UK-wide this is on a downward trend, with Halifax reporting it’s dipped to around 29% in 2017/18, but with massive regional variability (25, 26). This has a complex interplay with affordability and price-earning ratio.

Mortgage Payment as %

4A420BC000000578-0-image-a-1_1521210565456

Bottom line – you don’t want to be paying so much on a mortgage you can’t afford other day to day activities. Money Advice Service and Money Saving Expert have good tools to work this out (15,27). The balance between fixing or tracking affects interest rate. Generally go for a tracker and it’ll be closer to the BoE base rate, go for a fixed rate and you’ll pay some percentage for the choice. Money Saving Expert also includes tools to compare trackers, or calculate if paying out of a fixed rate mortgage could be better value (28). People are fixing to avoid a base rate rise, and there’s various calculators available to help with this too, allowing you to calculate how much extra you would pay (27,29,30). The risk if you don’t fix – the BoE base rate skyrockets and repayments become un-affordable.

Anecdotal evidence; I have a colleague who’s a bit of a flash git. At 28-29, he owns 3 properties (from a standing start) and drives a new LR Discovery (on PCP/ lease). He achieved this by buying a small property straight out of university, sub-letting rooms, using the cash created for a second BTL property, and then leveraging that for a flat. All on about 80% LTVs. He works full time 48 hours a week in the medical profession, then does another 20 hours on top overtime to pay his mortgages. Just thinking about it gives me the collywobbles.

What have I learnt?

My risk tolerance for my mortgage is substantially lower than for investments. Our LTV is now 80%, we’ve opted for a shorter (2 year) fixed rate on our extension while our other fixed rate runs out, and combined these make up 39% of our take-home income. Once burnt, twice shy. We’re hoping to fix next year on the other larger principal, and that rates remain low. This seems likely looking at conditioning paths (31). Even if it rises to the long run UK average of 5-6% we’re comfortable. In face we’ve calculated that we can tolerate up to a 10% BoE base rate and still be ok. Those would be days of property price collapse, repossessions, defaulting and as Ermine over at Simply Living in Somerset teaches us the hooded figure of negative equity (32,33). We’re not at the 15% of the the mid-’80s, and it seems unlikely we will be any time soon, but my tolerance for the chance of losing my home is minimal (34,35). But if you have the stomach and the wallet for it, then maybe a tracker is a decent current option. Ultimately I’ve learnt I’m not willing to gamble my home or my family, and I’m not so gung ho after all.

The Fire Shrink

References:

  1. https://www.forbes.com/sites/mitchelltuchman/2014/03/14/understanding-your-own-investment-risk-tolerance/#7f0edac140f5
  2. https://www.thebalance.com/what-is-risk-tolerance-2466649
  3. http://www.bbc.co.uk/news/business-44055400
  4. http://www.bbc.co.uk/news/business-41831777
  5. https://www.theguardian.com/money/2018/mar/05/mortgages-fixed-rate-loans
  6. https://www.theguardian.com/money/2018/apr/21/mortgage-rate-highest-two-years
  7. https://www.standard.co.uk/news/uk/rush-for-fixed-mortgages-as-bank-of-england-rate-rise-looms-a3816071.html
  8. https://www.thesun.co.uk/money/6120079/interest-rates-could-go-up-twice-this-year-but-how-will-it-affect-you/
  9. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  10. https://mortgageadvisers.which.co.uk/about/blogs/
  11. http://www.bbc.co.uk/news/business-44065472
  12. https://www.ftadviser.com/mortgages/2018/01/18/downsides-to-long-term-mortgage-fixes/
  13. https://www.independent.co.uk/money/mortgages/is-a-10-year-mortgage-deal-a-fix-too-far-10237879.html
  14. https://www.moneyadviceservice.org.uk/blog/how-long-should-you-fix-your-mortgage-for
  15. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator
  16. http://monevator.com/historical-uk-house-prices/
  17. http://blogs.lse.ac.uk/politicsandpolicy/land-prices-the-dog-thats-lost-its-bark/
  18. https://jamesjgleeson.wordpress.com/2017/04/03/historical-housing-and-land-values-in-the-uk/comment-page-1/
  19. https://www.ukvalueinvestor.com/2016/11/uk-house-price-forecast.html/
  20. https://www.theguardian.com/money/2014/apr/12/need-mortgage-new-rules-lenders-check
  21. https://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10787446/How-to-pass-the-new-mortgage-affordability-tests.html
  22. https://www.mortgagestrategy.co.uk/borrowers-lose-tightened-mortgage-affordability/
  23. https://www.moneyunder30.com/percentage-income-mortgage-payments
  24. https://www.moneyunder30.com/dave-ramsey-financial-peace-university-review
  25. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  26. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  27. https://www.moneyadviceservice.org.uk/en/tools/house-buying/mortgage-affordability-calculator
  28. https://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator
  29. https://www.which.co.uk/money/mortgages-and-property/mortgages/getting-a-mortgage/bank-of-england-base-rate-and-your-mortgage-albl35s6phq0
  30. https://www.uswitch.com/mortgages/interest-rate-rise/
  31. http://www.thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html
  32. https://simplelivingsomerset.wordpress.com/2014/04/06/when-not-to-buy-a-house-a-cautonary-tale-from-a-quarter-of-a-century-ago/
  33. https://www.financialsamurai.com/what-if-you-buy-a-home-at-the-top-of-the-market-and-a-recession-hits/
  34. https://www.theguardian.com/business/economics-blog/2014/mar/03/uk-interest-rates-a-brief-history
  35. https://www.theguardian.com/commentisfree/2018/may/10/celebrate-house-prices-falling-britain-property-values

Frugal Motoring – Should I buy a diesel?

Well, no, obv… Except yes?

What started as a rant post, I shall turn into a mini-series.

In Frugal Motoring I will discuss how to cheaply purchase cars, the pros and cons for various purchasing methods (straight up cash, loan, PCP, lease), ongoing political/ government motoring related machinations and how to keep your car running.
This week I will discuss why and when you should purchase a diesel instead of a petrol.

Diesel’s bad rep

As discussed in the last Frugal Motoring post, diesels have a bad rep. Audi continues to push the slide into mediocrity with the recent news that even new build A6/A7 cars are affected.

http://www.bbc.co.uk/news/business-44037673

But this does not extend to all manufacturers. Many (Mazda/ Merc/ Ford/ Kia) continue to produce diesel vehicles with low emissions and good MPG. The diesel brush tars them unfairly, suggesting all manufacturers have ignored the NOx as particulate emissions problems. If we take a look at AutoExpresses list of best ‘green’ cars for 2018, there slap bang in the middle is a diesel Astra.

http://www.autoexpress.co.uk/vauxhall/astra/86341/vauxhall-astra-16-cdti-ecoflex-best-low-emissions-green-cars

While if we look at the website Next Green Car, there’s a huge raft of diesels with low emissions. It’s important to note as well that most of these are general family cars, not flash executive motors sporting the latest tech. The technology for low emissions has trickled down to the mainstream. http://www.nextgreencar.com/emissions/low-emission-cars/diesel/

Changes, changes

Taxation is being increased on new cars, and some of the new rules will only affect future vehicles. Additionally, depending on emissions the extra taxation could be as little as £20/year, but are more likely to be around an extra £100-200/year for new low emissions models. Residuals for diesels remain strong but are expected to drop in the future with increased taxation. Governments decreasing taxation on diesels seems unlikely.

http://www.autoexpress.co.uk/car-news/102928/new-diesel-car-tax-rules-april-2018-changes-explained

Recent technology advances by Bosch also claim to mean lower emissions in the future, with a new tech targeting the pesky problem particulates and NOx:

http://www.autoexpress.co.uk/car-news/103331/new-bosch-tech-drastically-cuts-diesel-nox-emissions

https://www.driving.co.uk/news/new-nox-emissions-tech-bosch-save-diesel-engine/

When is diesel a good thing?

Diesel engines continue to offer generally better MPG when running at moderate RPM for long periods. So if you’re doing lots of long distance journeys diesel is probably best.

Diesel also offers better torque at low RPM. This means if you are regularly making long journeys or towing then diesel is a better fuel choice.

Which? offers an excellent calculator to work out how much you could save with efficiencies of a diesel engine:

https://www.which.co.uk/reviews/new-and-used-cars/article/driver-calculators-and-tools/petrol-vs-diesel-calculator

But it’s worth remembering most of these efficiencies rely upon turbos being spooled up, engines being warm and DPFs operating properly. Short journeys will kill Diesel Particulate Filters, and by nature most diesel engines will struggle to get up operating temperatures doing stop-start work in traffic. Around town this will also mean more invisible pollution for local pedestrians and residents.

Diesels also generally continue to cost more to purchase. This means that unless you’re doing starship mileage you may not save on fuel cost what you initially paid out extra in engine choice. Most buyers will only see a diesel recouping it’s cost after 6-7 years. The new taxation system is set to worsen this.

https://www.which.co.uk/reviews/new-and-used-cars/article/petrol-vs-diesel-cars-which-is-better

Summary

Broadly, diesels are better for:

  • Towing
  • Long distance commutes or frequent long distance journeys
  • Heavier vehicles
  • Multi-stop journeys

If you think this fits you, consider that new diesels will be cheaper to tax and more efficient, but will have a payback time calculation to make. Second hand with have less of this payback due to depreciation, but will be taxed more. Both may see a future drop in residuals. As with all big purchases think carefully about your requirements before buying.

Have a great week,

The FIRE Shrink

Further reading:

https://www.rac.co.uk/drive/advice/buying-and-selling-guides/should-i-buy-a-diesel-car/

https://www.moneyadviceservice.org.uk/en/articles/choosing-between-petrol-and-diesel-power

http://www.autoexpress.co.uk/car-news/103111/should-i-buy-a-new-diesel-car?amp

Frugal Motoring – Diesel Curse

The adage goes that you should write about what you know. While I continue to learn about investing I’ll blog about frugal motoring.

In the last few months there’s been lots in the news about diesel cars. Since ‘diesel-gate’ (what will it take for lazy journalists to stop adding -gate to things? Door-gate? Gates-gate?) their social popularity stock has been in free fall. Suddenly they’re very out of fashion, and the Daily Mail warns us that many nuns and kittens will die if you buy a diesel. Should you be concerned?

Motoring fashion

The rise of diesel cars as a proportion of total sold really took off in the ’90s and early ’00s. Prior to this diesel engines were the preserve of commercial vehicles; loud, clattery, generally large displacement and utilised for their torque curve. In the late 1980s and early 90s manufacturers began to make smaller displacement, less tractor-ish, engines. This was largely possible due to a spread of direct injection and common rail technology, bringing more refined efficient running. These found their way into a wider variety of cars including corporate, higher end models. Engines like the Peugeot XUD, VAG 1z/ AHU/ AAZ/ PD and Mercedes OM60x series spread the word. Reps doing mega-mileage sang the praises of the fuel efficiencies and reliability of these donks.

Diesel had it’s golden age. Emissions concerns in the 00s pushed manufacturers to reduce harmful large particulate output (the old diesel smokers) while at the same time increasing efficiencies. Turbos, diesel particulate filters (DPF) and exhaust gas recirculation (EGR) were born. Diesel engines spread across consumer car ranges and people were seduced by their quoted MPG figures (leading to low tax brackets).

Emissions controls

The combination of emission controls and the spread across consumer car ranges lead to people using diesel cars who previously wouldn’t. Cars got heavier due to increased safety features all while tax incentives towards high efficiency vehicles continued this push. It was now people doing 5,000 miles/year as well as those doing 50,000, and so issues began. Engines were built for higher combustion pressure using tighter tolerances. Diesel engines are more efficient when up to temperature, and EGR/ DPF function best with long duration moderate RPM runs. The short distance, short duration journeys of those moving from little petrol cars to little diesel cars couldn’t produce the sustained RPMs required. Oil barely had time to warm up and lubricate the tight tolerances. People began to complain that their cars were not as efficient as expected, or not as reliable, or were doing DPF regen too frequently. Clouds gathered on the horizon.

Diesel-gate

It became difficult to develop engines that could meet the power/ weight/ efficiency/ emissions demands of the population and government with current technology. Some manufacturers built engines with tight tolerances that met standards at the expense of reliability (see Renault/ Nissan’s DCI). Others reduced displacement, upped boost pressure or used AdBlue (urea injected into the exhaust system, made from pig urine). VAG clocked that international emissions testing systems were always run a certain way, and therefore developed a programme in the cars ECU to detect when the car was being tested and tune for emissions at the detriment of performance. They were found out, and how the hysterical tabloids shrieked with indignation. Imagine that, a large corporation finding a way round government law and not telling the public!

At the same time scientists began to measure and report the elevated toxic levels of NOx and very fine particles that the new diesel engines chucked out. Those new diesels weren’t so clean after all, they had just changed from visible smoke to tiny invisible particles. A tipping point was reached.

Double standards

That brings us to now. The government, ever the one to follow the will of the people (shriek of The Sun/ Mail), has started to roll out new rules. Among these include that any Engine Management Light on, removal of Diesel Particulate Filter or Exhaust Gas Recirculation will be a fail come MOT time. This affects all car owners, but particularly diesel owners, where second hand owners replace or remove DPFs/ EGRs in pursuit of better reliability/ fuel economy.

https://www.theguardian.com/money/2018/apr/14/mot-changes-strict-tests-diesel-cars-fail

At the same time, the recognition of the other harmful exhaust gases has caused taxs and ultra low emissions zones to target diesel drivers.

https://www.bbc.co.uk/news/amp/business-43655703

I applaud the manufacturers who have managed to meet required standards. The technology (in it’s infancy 10 years ago) has matured and it is possible to have highly efficient diesels that haven’t bent the rules. Diesel is an excellent fuel for efficiency and torque.

Why does this matter to us?

Three points here. First the obvious. It will cost more to own a diesel car as tax classes change in the future. You may get stung with a hefty bill when you go for an MOT and find out that secondhand BMW 116d is missing it’s DPF. Manufacturers are also changing engines to make them meet new emissions standards, but in some cases this is worsening performance or MPG. Many new diesels aren’t meeting advertised MPGs in real world environments as the listed MPG figure is from a rosy scenario.

Additionally, you may have received a letter from the manufacturer asking you to bring your car in for a ‘fix’. VAG are the big name for this. I would think very carefully before getting the ‘fix’. Pistonheads (the car forum for powerfully built company directors driving shiny cars in shiny suits) is full of very interesting threads about documenting experiences with their ‘fixed’ cars.

https://www.pistonheads.com/gassing/topic.asp?h=0&f=86&t=1589780

Second, broader, point is about the knock on effect on the UK economy. We may no longer be the British Leyland industrial powerhouse nation, but many thousands of jobs across the UK rely upon the motor industry. The UK retains a reputation for high-tech manufacturing. Many of the manufacturers who have done well out of the rise of diesels produce the cars and engines in the UK.

https://amp.theguardian.com/business/2018/mar/05/diesel-uk-car-sales-fall-petrol-electric

The fall in demand has resulted in a fall in production volume, and jobs are being lost.

End doubts over diesel’s future, says Ford boss – http://www.bbc.co.uk/news/business-43885516

Nissan to cut hundreds of UK jobs – http://www.bbc.co.uk/news/business-43841922

Jaguar Land Rover to shed 1,000 contract staff – http://www.bbc.co.uk/news/business-43756202

It remains to be seen what will happen, but it’s unsettling to note the government not supporting manufacturers producing alternatives.

Third and final point and the one I see less writing about; diesel residuals. For the past 5-10 years people have been buying diesels, lots on PCP or finance deals, expecting when they come to sell or hand back the car will be worth a certain amount. That amount may no longer be what was expected. For the owner it’s a painful lump to swallow. For finance companies with hundreds of diesel cars on file, it’s a much bigger financial black hole. More on this another day.

I have a diesel, what should I do?

You’ve just bought your Vauxhall Insignia CDTI using a bank loan. You do 20k a year chugging around motorways, and find the car comfortable.

Probably nothing.

Check where you stand for MOT changes then drive your nice car.

Diesels remain an excellent engine choice if you’re doing high mileage where the torque and MPG show. Soporific sensationalist journalism doesn’t change it’s utility.

I continue to drive a 25 year old diesel. It’s loud, smelly, noisy and chucks out clouds of clag. It costs very little to service, very little to tax and can theoretically run on vegetable oils for maximum environmental offset.

Car purchases will be the biggest lump sum spend after a property, so always analyse engine choices pre-purchase. Don’t be swayed by government incentives which may change with the government’s mood.

Next time on Frugal Motoring: The PCP Black Hole

Yours,

The FIRE Shrink

The Yearly Plan

The first yearly plan for my finances, this data is just before tax-year 2018/9.

Up until now I’ve been pretty ad hoc with my finances, much like most professionals (I assume). Budgets are based on how far into my overdraft I am and spending in line with my means. Big surprise bills go on 0% credit cards. I’ve always spent as much as I’ve earned, and have limited tolerance for overexposure (unlike some colleagues). Time now for a change and some structure, namely the flowchart from r/UKpersonalfinance

My main debts are mortgage, credit card, and a small loan to a family member to pay for our wedding. The loan has no interest, and the credit card is 0% for another 2 years. I make more than minimum payments (usually 10x) each month.

Goal 1: Build an emergency fund.

Initially one month, but I’d like 6 for security. I’ve been investigating where to put this, and reading about new banks for current accounts. I’d like to have the benefits of a digital bank as I’m abroad a few times a year. This appears to be a good summary:

https://www.telegraph.co.uk/personal-banking/current-accounts/monzo-atom-revolut-starling-everything-need-know-digital-banks/

So I may set up a Starling account and a Santander 1-2-3 regular saver for it’s 3% interest rate.

Goal 2: Pay off debts

Simple really, but I’ll set up a plan rather than ad hoc.

Goal 3: Reduce superfluous outgoings.

Not too many, but deserves it’s own post.

Goal 4: Commence investing!

I’ll check back in quarterly to see how I’m meeting goals.

Yours,

The FIRE Shrink

The Beginning

Welcome,

As my first post, and a first attempt at blogging, I’ll summarise the goals of this page:

  • Document my own financial journey

In the last few months I’ve gradually been indoctrinated into a FIRE way of thinking thanks to multiple blogs (Monevator, Mr Money Mustache, /r/UKPersonalFinance). With a new tax year I aim to take a hard look at my finances, and use this blog page to keep a track of my progression from complete novice investor.

  • Balance the hard FIRE approach with lifestyle and well-being

I’ve found many of the blogs I’ve read take an austere approach to reducing financial spending. This appears to be either by choice (here’s looking at you youngfiguy.com), or by necessity of limited income; providing self-actualisation and contentment for the former, and allowing the latter to survive. I hope to balance and moderate this to not miss out on the good things. Having FIRE without the Fear Of Missing Out (FOMO).

  • Examine the philosophical basis of financial freedom

Linked into the above, many of the FIRE blogs and pages out there encourage us to take a long hard look at our personal goals, hopes and aims, as well as our finances. To my psychological and philosophically-inclined mind these appear rooted in self-centred philosophical theories. I’ll document my ruminations here, as my own personal Meditations.

Yours,

The FIRE Shrink