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Is A Car An Asset? Is It A Liability?

car next to pile of money as an asset

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The concept of ‘assets’

Assets are essentially anything of value that an individual or entity owns.

So, if you:

  1. Own your car outright, and
  2. Your car has some value

It would be classed as an asset.

Assets come in many forms. These include financial assets such as stocks and bonds, ‘real’ tangible assets such as real estate, and more ‘abstract’ intangible assets such as patents & copyrights.

All these assets contribute to your financial portfolio and your overall net worth, including your car.

But there is some more nuance to the question.

There are two views when it comes to whether a car is an asset. The traditional view and the alternative view.

The traditional view: a car is a depreciating asset

If your assets as a whole appreciate in value, your net worth grows. If they depreciate in value, your net worth falls.

A car is generally considered a depreciating asset except in certain circumstances (for example, classic cars that can grow in value over time).

Under the traditional view, when it comes to automobiles, depreciation is an inevitable and often significant factor. The moment you drive a new car off the dealership lot, it starts to lose value.

Cars may lose up to 20% of their value in the first year and 15% per year thereafter. Remember, just because you cannot see that money leaving your bank account, does not mean you are not losing money.

When you come to sell the car, you will see the loss in the form of a lower trade in value.

The alternative perspective: the potential of cars as assets

While the traditional view portrays cars primarily as depreciating assets, there’s an alternative perspective that emphasizes the potential for cars to be positive, revenue-generating assets in certain circumstances.

This perspective recognizes that cars can offer more than just transportation; they can contribute to an individual’s financial well-being in various ways.

Some cars, particularly vintage or collector’s items, can appreciate in value over time. Classic cars, rare models, or those with historical significance can become valuable assets for enthusiasts and collectors.

Occasionally, when there is a car supply shortage, the price of certain cars in the second-hand market can temporarily rise. This happened during the covid pandemic, for example with Tesla vehicles.

However, you only realize this temporary increase in value if you chose to sell during this time. The prices since normalized.

The rise of the sharing economy has opened up opportunities for car owners to generate income by renting out their vehicles through platforms like Airbnb for cars or ride-sharing services like Uber and Lyft. In this sense, your car becomes an income-generating asset.

Finally, owning a car can provide convenience and utility that enhances your lifestyle and career opportunities. For example, having reliable transportation can enable you to access better job opportunities or travel for work, potentially increasing your income over time.

Is a car a good investment?

Generally, for most people in society that simply need a car to get from point A to point B, a car is not going to be a good investment.

You should focus on getting a good quality, reliable used car and buying outright where possible.

If you are considering buying classic cars with the aim for them to appreciate in value, note that there is no guarantee they will.

In 20 years, the classic car you buy may be looked upon less favorably. General wear and tear, whether you are driving the car or not, can also impact the value of the investment through maintenance costs.

If you are aiming to buy a car to generate side income, for example by renting out your car on Turo or driving Uber/Lyft, be aware that the costs associated with owning a car can significantly offset any profits you perceive to be generating.

Make sure you consider all the costs associated with owning a car in the below section titled ‘The impact of a car on personal wealth’.

Is a car a liability?

A car itself is not a liability. However, the loan you may have taken out to purchase the car, is.

The outstanding balance of the loan is considered a liability on your personal balance sheet until it’s paid off.

You can also consider all the expenses associated with owning a car liabilities, such as fuel, insurance, maintenance, repairs. That’s because these are outgoings; they represent money going out of your pocket.

A car is a personal asset with practical purpose

Most assets, such as stocks, bonds, patents, digital content and so on do not have a ‘practical’, personal purpose in daily life.

For example, financial assets are primarily held for investment or income generation.

Personal assets like cars on the other hand, are usually acquired to fulfill personal needs like commuting, running errands, or enjoying leisure activities.

For many, a car is a necessity. It is not listed in their financial portfolio, and it does not fall under their net worth calculations as it’s considered a necessary expenditure for their day-to-day existence.

You therefore need not consider your car to be part of your financial portfolio at all, if you wish.

The impact of a car on personal wealth

Just because your car does not contribute to your net worth does not mean you should not try to minimize its negative impact on your wealth.

People often underestimate the cost impact of a car. If you intend on viewing your car as an asset, you should deduct any associated costs to work out its true value.

Here are 20 (yes, 20!) costs that are associated with owning a car:

  1. Purchase Price: The initial cost of buying the car, which includes the vehicle’s base price, optional features, and taxes or fees.
  2. Depreciation: The decrease in the car’s value over time. Cars typically depreciate rapidly, especially in the first few years after purchase. Each mile you drive reduces the value of the car.
  3. Financing or Loan Payments: If you financed the purchase with a loan, you’ll have monthly loan payments, which include the principal amount borrowed and interest.
  4. Interest on Car Loans: The cost of borrowing money to purchase the car, typically in the form of an interest rate on your auto loan.
  5. Insurance Premiums: The recurring cost of insuring your car against accidents, theft, and damage. Insurance rates can vary significantly based on factors like the car’s make and model, your driving history, and location.
  6. Fuel/Gas: The cost of fuel required to operate the vehicle. Fuel expenses can fluctuate depending on gas prices and how frequently you drive.
  7. Maintenance and Repairs: Routine maintenance (oil changes, tire rotations, brake checks) and unexpected repairs can be significant ongoing expenses. Older cars may require more frequent and costly repairs.
  8. Taxes: Depending on where you live, you may need to pay annual vehicle registration fees, property taxes on the car, or sales taxes when purchasing a new vehicle.
  9. Parking: If you live in an urban area or require parking at work, you might need to pay for parking permits or metered parking, which can add up over time.
  10. Tolls: If you frequently drive on toll roads, bridges, or tunnels, you’ll incur toll charges.
  11. Emissions and Safety Inspections: Some regions require regular vehicle inspections to ensure that your car meets emissions and safety standards. These inspections often come with associated fees.
  12. Traffic Tickets and Fines: Fines for traffic violations can be an unexpected expense if you receive citations for speeding, parking violations, or other offenses.
  13. Interest on Credit Cards: If you use credit cards to cover unexpected car-related expenses, you may incur interest charges if you don’t pay off the balance in full each month.
  14. Vehicle Registration Renewal: The cost of renewing your vehicle’s registration each year, which may include fees for license plates and stickers.
  15. Extended Warranty or Service Contracts: Some car owners choose to purchase extended warranties or service contracts to cover repairs and maintenance, adding to the overall cost of ownership.
  16. Emergency Roadside Assistance: If you subscribe to emergency roadside assistance services, this is an additional expense.
  17. Car Washes and Detailing: Regular car washing and detailing help maintain the vehicle’s appearance but come with associated costs.
  18. Accessories and Upgrades: Purchases of accessories like roof racks, GPS systems, or interior upgrades can add to the cost of ownership.
  19. Parking Tickets and Towing Fees: Expenses related to parking violations, towing, or impound fees if your car is towed.
  20. Wear and Tear: Over time, your car may experience wear and tear, leading to reduced resale value or the need for costly repairs.

All of these will impact your net gain/loss when you come to sell or trade in your car.

Should I buy a car outright or finance one?

Generally, it is best to own your car outright. The interest on your car financing is likely going to cost you more in the long run than paying for your car outright. The loan is also a liability.

However, if you can get a 0% finance loan, you could consider saving the money you would have spent on the car instead (if you can get a good interest rate) or even investing it, providing that money is not required to pay off the car (your capital is at risk when investing).

Don’t be tempted to buy a car on finance just because it’s a ‘good deal’. A used car is generally still better than a brand-new car with 0% finance. Remember, it loses about 20% of its value as soon as you drive it off the sales lot.

One of the main benefits to buying a new car is the reliability and warranty. It’s much less likely to go wrong.

To benefit from this whilst not paying new-car prices, consider getting a car that is only a few months or a year old, perhaps getting an ex-demonstrator car. You get much of the peace of mind (in terms of reliability) as a new car, but without the new-car premium pricing.

If you currently own a car on finance, consider keeping it as soon as you finish your last payment.

Whilst it’s tempting to trade it in for the new model, it usually provides little additional value. The new car novelty wears off quickly, whereas the extra money in your pocket each month can provide much more value to your life.

Our view: Is a car an asset?

Yes, a car is an asset. But as its value decreases over time in most cases, it is not a good investment.

People often associate the term ‘asset’ with ‘investment’. They might see assets as good things that generate money and increase their net worth.

Cars are, in the vast majority of cases, depreciating assets and their costs should be minimized as much as possible.

A car is just a mechanism for you to get from point A to point B. Be smart, and get a reliable, used car and purchase it in cash in full, if you can.

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