It’s pretty easy to determine your assets and liabilities until you get to your car. Is a car an asset, or is it a liability? Ask a group of people, and you’ll likely get two different responses. So, how do you tell which is correct? This article uncovers the truth about assets and liabilities and how it relates to your car. That way, you can accurately calculate your net worth!
Assets vs liabilities and buying a car
Two factors make up your net worth - assets and liabilities. One increases your net worth, and one decreases it. Of course, we all want more of what increases our net worth, but it often takes loans (liabilities) to get us there. But is a vehicle an asset or a liability? Let’s look at the definition of both.
An asset is anything valuable you own. Common examples include stocks, bonds, bank accounts, jewelry, and collectibles. Anything you can liquidate (sell) for cash is an asset. Most assets appreciate, but not all. An asset increases your net worth because they are worth money.
A liability is money you owe to a bank or another person. A car loan, credit card debt and mortgage are all examples of liabilities, and they decrease your net worth. When you owe someone money, it means you have less net worth because you’d have to liquidate your assets to pay off the debt, leaving you with less money in hand.
Is a car an asset?
So is a vehicle an asset? Most people consider a car an asset. It has value, and if you needed to, you could sell it today and get money for it. While cars may cost you money, they aren’t necessarily a liability because they have value. The question is, how much value do they have, and how long does it last?
Is a car a liability?
Some people look at a car as a liability because it costs money to maintain the car. You have to pay for gas, oil changes, other regular maintenance, and car expenses. You also have to pay to insure it and repair it when it breaks down. In the true sense of the word, though, a car isn’t a liability because it has value. Instead, it’s a depreciating asset.
Is a car a depreciating asset?
The best way to describe a car rather than ‘it’s kind of like an asset, but kind of like a liability, is that it’s a depreciating asset. A depreciating asset is something that has value that decreases over time.
When you drive a new car off the lot, for example, it loses approximately 10% of its value. It was worth one value when you bought it, but it was worthless the moment you left the lot. It’s a depreciating asset.
You lose equity in the car as time goes on rather than gaining equity, as you would with a house, for example. Cars aren’t worth more in a year or two - they are worth less money.
Now, what if you financed the car - is it a liability then or still a depreciating asset? The car itself remains a depreciating asset because it’s not affected by the car loan. Other factors determine its value, but the loan is a liability that decreases your net worth.
If you sold the car, you’d pocket the difference between the loan payoff and the sales price. In a perfect world, you’d make more on the car than the outstanding loan amount, but it doesn’t always work that way.
Knowing this, it’s important to determine what car you should buy, as it’s not a one-size-fits-all approach.
How to tell your car’s worth
The most common way to tell how much a car is worth is to use Kelley Blue Book. All you need is basic information about your car and how you plan to sell it - privately or trade-in to get your car’s value.
Within seconds you’ll see how much your car is worth or how much someone might buy it for if you sold it on the street. If you traded the car in, you’d get less money for the vehicle because dealerships pay less for trade-ins since they usually have to put money into the car to fix it up to help it sell quickly. But do you need Kelley Blue Book to value your car?
Calculating your car’s depreciated value without KBB
If you don’t want to use Kelley Blue Book and would rather use standard depreciation to value your car, here’s the general rule of thumb.
- Most cars lose 10% of their value in the first year
- Each year following, they lose another 15% of their value
After five years, a car is worth approximately 40% of what you paid for when you bought it. When you figure the car’s value based on its age, use the price you paid for the vehicle, not the retail price. Most people negotiate the sales price before buying the car - use that number and take off the allotted appreciation for the car’s age.
Another more straightforward way is to browse the internet and see what other people sell the same car (make, model, and year) for, but you may need to adjust for location. For example, cars are more expensive in California than they are in Florida.
Your car and net worth: Are they related?
Your car and net worth are related as long as you include the vehicle and the car loan in your net worth. One may cancel out the other for a while, but eventually, as you pay your car loan down (or off), it will become less of a liability.
But the longer you keep your car, the more it will depreciate, so at the most, if you keep your car for five years, you’re looking at adding 40% of the car’s price to your net worth.
When you calculate your net worth and include your car, just remember, it’s a depreciating asset that won’t be worth nearly as much in the next few years.
Conclusion: Is a car an asset?
It feels a lot better to consider a car an asset rather than a liability. Its proper term is "depreciating asset", but that doesn’t sound as nice, right? When you wonder "is a car an asset?", keep in mind that what your car is worth today isn’t what it will be worth next year or the year after.
It will continually decrease, but if you buy a new car and have to borrow money to buy it, you’d decrease your net worth as well.