A car has value, but also costs a lot of money to run. So, is a car an asset or a liability? How should you include your vehicle in your net worth calculation?
To make a long story short, a car is an asset. But unlike real estate or savings accounts, a car is a depreciating asset, which is why many confuse it with liabilities.
Let’s take a closer look at why automobiles are a bit of a gray area when calculating net worth.
Why Is a Car an Asset?
Any of your possessions that are worth something now or later in the future are assets. Since your car retains value (even though it loses most of it over time) it is still an asset. What’s more, you can always sell your car for cash or use it to generate income (say by using it for ridesharing or delivery services), which makes it an asset by definition.
What kind of an asset is a car?
As mentioned above, motor vehicles decline in value in time due to general wear and tear, the mileage covered, and the degree of maintenance involved. This is why cars are considered depreciating assets, in contrast to appreciating assets, which increase in value over time, such as investments in real estate or saving accounts.
According to Kelley Blue Book, automobiles shed around 20% of their original value in the first year alone. The rate of depreciation only gets worse in the following years with cars losing about 60% of their value in the first five years.
That said, how fast your vehicle depreciates depends on its age as well as how well the vehicle is maintained. For example, a car that has been damaged in an accident can lose more of its value. The same goes for older automobiles whose value declines every time a new model is released for sale.
Make and model also play a role as some brands and models lose value faster than others. For instance, based on data from US News & World Record, Toyota Tacoma (32.4%) and Jeep Wrangler Unlimited (30.9% after 5 years) have the slowest depreciation rate over five years. By contrast, the BMW 5 Series (70.1%) and Nissan Leaf (70.1%) depreciate the fastest over 5 years.
Why Is a Car Considered a Liability?
A liability is money you owe, whether to the bank, online lender, or another person. Some examples of liabilities include credit card debt, outstanding mortgage, and a car loan.
Unlike assets, liabilities decrease your net worth. And since you lose rather than gain equity with an automobile, many people tend to see motor vehicles as a financial burden rather than an asset.
Another reason why vehicles are seen as a liability is the cost of ownership. Research from the American Automobile Association puts the average cost of owning and operating a new car at $10,728 a year or about $894 a month. This includes annual costs such as registration, taxes, and insurance, as well as ongoing expenses, including gas, repairs, parking, and regular maintenance and upkeep.
Put simply, since you can never resell the car for the original price and you are paying for running costs, you are technically losing money by owning a vehicle. In spite of that, an automobile still retains value which makes it an asset and not a liability.
Note: You need to factor in all of this and the depreciation costs when buying a new vehicle, especially if you are a first-time car buyer.
Is a financed car still an asset?
Yes, a financed car is still an asset for the same reasons mentioned above—not only does it have inherent value, but a financed car can be sold on the market at any time for cash.
On the other hand, the money you owe on your car loan is a liability.
Car loans are one of the most common ways to finance a new vehicle purchase—in 2020 alone, 85.5% of newly purchased automobiles in the US were backed by this type of financing. Under the loan agreement, you need to pay off the money you borrowed within a specific timeframe, so the repayments are your financial responsibility and therefore a liability.
How Should I Include My Car in My Net Worth Calculations?
Your net worth is calculated by subtracting your assets from your liabilities so since your car is an asset (albeit a depreciating one) it should be included in your calculations as one. If you have a car loan, you should include that as a liability.
Keep in mind that you need to determine the vehicle’s current market value when calculating your net worth.
How to determine your car’s market value?
One of the best and easiest ways to find out how much your car would fetch on the market is to visit the Kelley Blue Book website. Based on your vehicle’s specification and VIN number, KBB can give you estimated and pretty accurate values.
Other ways to find out the value of your automobile include,
- Edmunds: Similar to Kelley Blue Book, Edmunds provides estimated car values based on your vehicle’s specs (make, model, year), and VIN number.
- National Automobile Dealers Association (NADA): This website provides estimated values for cars based on make, model, year, condition, and mileage.
- Local dealership: Keep in mind that some dealers might lowball you since it is in the dealership’s best interest to buy at low and sell at high prices.
- Independent appraiser: You may hire an independent appraiser to come to your home and inspect your car to determine its value. Typically this will give the most accurate estimation, but it is also the costliest option.
FAQs
How is a car’s depreciation value calculated?
A car’s depreciation value is calculated by determining the difference between the purchase value of the car minus the current value of the vehicle (after owning it for a set number of years). So hypothetically, if you buy a car worth $40,000, it will lose $10k in value during the first year of ownership, putting its current market value down to $30,000.
In five years’ time, the car will shed almost $25,000 of its value, so its market price will be around $15,000.
You can determine how fast or slow your car depreciates by using an online calculator or you can compare your vehicle to similar models to estimate its market value and then subtract it from the purchase price. Which method you use and regardless of how you pay for your motor vehicle, make sure to factor in depreciation when shopping for a new ride.
Can a car ever be considered an investment?
Yes, a car can be considered an investment, but only if it is a vintage model that has the potential to appreciate over time. These types of cars, also known as old-timers, are sought after by collectors and enthusiasts, and their value can increase significantly with time if they are well-maintained and in good condition.
However, unless you own a 1955 Mercedes 300 SLR Uhlenhaut Coupé or another of the most expensive cars ever sold, considering a motor vehicle as an investment is not a good idea. If you are thinking of investing, consider other alternatives, such as putting your money in the stock market or buying residential and commercial real estate.
Is a leased car an asset?
No, when you lease a vehicle you don’t own it, so it is not your asset. The payments you make on the car though are a liability and will decrease your net worth.