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Personal Finance from the Broke Perspective

Is a Car an Asset or a Liability?

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When it comes to determining assets and liabilities, there are only a few items that can divide the opinion of people like a car. While some people believe that a vehicle is a liability, others feel it is an asset. The split ideas occur because the maintenance of a car requires money from time to time. At the same time, it is still possible to sell a vehicle for a profit.

So, is a car a liability or an asset? Relax and read this article to understand everything about this subject.

First, let’s take some moments to understand the difference between an asset and a liability. This understanding will help us conclude whether a car is a liability or an asset.

What Is an Asset?

An asset refers to any item that a person owns and can get some value from it. Generally, your net worth increases based on the assets that you have. Retirement funds, cash, investments like bonds and stocks, and personal valuables such as collectibles and jewelry are all excellent examples of what an asset is.

What Is a Liability?

A liability, on the other hand, is an item, debt, or obligation owed to another person. Unlike the assets, your net worth will reduce when you have liabilities. Car loans, credit card debt, personal loans, mortgage, and students are examples of responsibilities.

The difference between these two terms is: anything you own outright can be regarded as your asset, whereas any item you need to pay a debt on is your liability. Your liability harms your net worth, while your asset has a positive effect on it.

Is a Car a Liability?

The answer to this question can be a little tricky because you can own your car but still need to pay money for its maintenance, fueling, and other things. The correct answer to this question is that your vehicle is an asset. However, it is a depreciating asset.

What Is a Depreciating Asset?

After answering the question “is a car a liability?”, we should shed more light on what a depreciating asset is. A depreciating asset is a form of asset that has the potential to lose value as time goes on. Unless you are using your vehicle for some types of business, it is most likely a depreciating asset.

If you purchased a car at a particular amount last year, that car’s equity would have reduced significantly today. However, it is still an asset as you can sell it to make some amount, albeit lower than its original value.

Is Your Car an Asset If There Is a Car Loan on It?

This is another point where it gets even more confusing. But the answer is still the same. Regardless of the car loan, your car remains a depreciating asset. When you sell the vehicle, you can even get value from it. Nevertheless, when you have a car loan, the ownership of a car will hurt your net worth. Therefore, the car loan itself is a liability, whereas the car is an asset. In simple terms, the burden is not about the car itself but rather depends on the car loan.

One dicey situation is that if you sell the car and its value is lower than the car loan, is a car a liability in this case? In a real sense, it is still an asset that does not have a lot of value that can cover your debt. The car you sold has not reduced your net worth; it is the loan that could cut it. Of course, in some cases, you may sell the car and still have some money left. So, this makes it clear that the vehicle itself is not the liability.

How Can I Determine the Value of My Car?

Since your car affects your net worth, you will do yourself a lot of good by determining the worth of your car. Here’s what to do:

  • Determine the value

A brand new vehicle loses over 20% of its initial value by the end of the first year of its purchase. It will continue to lose its worth by 10% yearly in the second, third, fourth, and fifth year of its purchase. By using this knowledge, you can calculate how much your car is worth on your own.

  • Go to Kelly Blue Book and other similar websites

Blue Book is a site designed to help people determine the current value of their car. If you have all the information about your car, this site will calculate the worth of your vehicle easily and quickly.

Here’s what you need to provide on Kelly Blue Book to know the value of your car:

  • Your car’s make and model
  • Year of its production
  • Its mileage
  • Its color
  • Its current condition

The site will offer you different value options based on the method you want to use to sell your car.

In most cases, the lowest value for your car will come in a trade-in. However, you can easily find a dealership that will allow you to add money to your vehicle to get a new car. If you are looking for the most significant value for your car, you will need to sell to a private party buyer. Nevertheless, it may be not very easy to find someone who has an interest in buying your car.

Are There Any Options to Kelly Blue Book?

Besides Kelly Blue Book, other websites that offer similar services include Edmonds and NADA. These websites also have an excellent database and system that can help you know how much your vehicle is worth instantly and seamlessly. Although the values from these websites will not be the same, you can use those estimates to calculate the average cost of your car.

Check out the values of cars that are similar to yours

Some people are using the same car model that you are using. So, you may be able to find others who have already determined the value of their cars. Take the time to visit Craigslist, CarGurus, AutoTrader, eBay Motors, and other similar websites to check the worth of your vehicle. When searching for the worth of your car on these websites, pay attention to the local listings as the values of vehicles can differ based on the location.

How Can I Calculate My Net Worth?

The calculation of your net worth is simple and straightforward. First, you should make a list of your assets as well as your liabilities. Remember that if you bought your car outright, you would add its value directly to the list of your assets. Afterward, it would help if you calculated your net worth by subtracting your total liabilities from your total assets.

It is worthwhile to note that your net worth can be positive or negative. It will be favorable if your total assets are more valuable than your total liabilities. Otherwise, it will be harmful if the total liabilities are worth more than the assets.

How Do I Calculate My Net Worth If I Have a Car Loan?

If you have a loan on your car, you need to remove the amount owed from the value of the vehicle. Let’s assume that the current worth of your car is $20,000 and your car loan is $14,000. Subtract the car loan from the current value of your car, and the remaining amount will be $6,000. You should add the remaining amount to your net worth.

What Is the Importance of Knowing Your Net Worth?

Your net worth refers to the strength of your finances. It is an all-important number that shows the difference between your current assets and liabilities. Positive net worth means that your financial health is great. In contrast, negative net worth may indicate that you are not doing okay financially.

However, you should note there are instances where a negative net worth does not necessarily mean that your finances are bad. For example, if you are using lots of your income to settle a student loan, your net worth may be detrimental for the meantime. Nevertheless, such an action will help you gain financial freedom in the future after you have settled the student loan.

Conclusion

Finally, is your car a liability or an asset? Yes, your vehicle is an asset, albeit a special one that depreciates. You should bear it in mind that it will reduce in value as time goes on, but it will still retain some benefits as long as you own it. Nonetheless, this does not change the fact that it is still an asset. So when you are calculating your asset, you should add your car to your asset while you add any available car loan to your liabilities.

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Keep Your Old Car Or Buy A New One?

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If you have owned a car for a while, you may be visiting your mechanic for the fifth time this year and asking if it’s time to buy a new vehicle. In many cases, keeping an old car is more cost-effective than purchasing a new one. However, buying a new car can offer several advantages, including advanced safety features and broader employment opportunities. There’s no clear-cut answer to this question, as most factors that could influence this decision are unique to each vehicle owner. As you evaluate your options, make sure to compare the financial benefits against intangible factors that are important to you.

Reasons to Keep Your Old Car

There are a few financial upsides to keeping your car. With an older vehicle, the costs are generally limited to insurance and maintenance. However, with a newer vehicle, you generally have to pay a down payment, registration and titling fees and monthly payments if you choose to finance the vehicle. You may also end up paying more for insurance with a new car, losing the rates you had with the older vehicle. With this in mind, it may not be financially wise to purchase a new vehicle if you are on a tight budget, it. Furthermore, cars depreciate in value very quickly. This means that within the first year of purchasing a new vehicle, it will have already lost up to a quarter of its value. In this case, it might be better to keep your older vehicle.

One of the most common reasons people want to get rid of their car is the cost of repairs. You might find yourself regularly visiting the mechanic to figure out why your car isn’t running properly. If that’s the case, it’s important to compare the cost of repairs against the car’s cash value. A good rule of thumb when assessing this is using the following strategy: If the cost of repairs exceeds at least half of the vehicle’s market cash value, then it’s not worth repairing.

Keep in mind that as a vehicle’s mileage increases, so does the amount of repairs. For example, many vehicle owners must replace the engine’s timing belt around the vehicle’s 100,000 miles mark. Other repairs and replacement, such as the water pump are common once the vehicle reaches this mark. These are common maintenance repairs as mileage increases the vehicle’s wear and tear. However, if the vehicle is in otherwise good condition, a replacement might be the most cost-effective solution.

Reasons to Purchase a New Car

There are many reasons to buy a new car. The first and perhaps most attractive reason is the modern safety and technology features. The newer the vehicle, the more safety features it will generally include. Not only can these new features keep you and your passengers safer, but they can also affect your insurance. Some car insurance providers offer discounts to motorists with vehicles that have certain safety features. These features signal to the insurance companies that the vehicles are less likely to get severely damaged in an accident, and passengers are less likely to sustain major injuries.

Do you want the option of making phone calls in your car? Perhaps you want to listen to your curated playlist. Newer vehicle models are equipped with various technological features that older vehicles may lack. These include Bluetooth connection, access to premium radio services, garage door transmitters and more. For many drivers, these features make for a more enjoyable driving experience.

Moreover, consider your lifestyle. What does your commute look like? Long drives may not be ideal with older vehicles as they have already experienced wear and tear and are more likely to break down on the road. A new vehicle will provide a sense of security to the owner and make long commutes more secure.

Ride-hailing and food delivery services have grown in popularity as easy ways to make money. Many companies have strict eligibility requirements for drivers and the vehicle. Common qualifications for vehicles include a model year 10 years old or younger and mileage that does not go beyond 100,000. While it might vary slightly depending by state and organization, these are standard practices across most companies. If you are interested in engaging in this type of employment, consider purchasing a new car.

Additionally, getting a new car can give you a boost of confidence, especially if your job requires driving clients around. While this isn’t a quantifiable reason, how you feel while driving should play a role in your decision.

Third Option

There is also a third option that combines the benefits from both scenarios: purchasing a used vehicle. While many used vehicles may come with their own set of problems, you can find a good deal on a great car if you do a bit of research. This can be accomplished through a title check, requesting a Car Fax report or having a trusted mechanic perform a vehicle inspection. Through this, you can get a newer vehicle that fits within your budget, has newer features and is free of major issues without having to pay the high dollar amount for a brand new car.

Selecting the Best Used Car

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Buying a car is, possibly, one of the most important investments you can do. For this reason, there are multiple steps you should consider, before making your decision. We hope our guide to selecting the best used car will help you to accomplish that.

Establish a budget

When establishing a budget for buying a used car, it is important that you take into consideration the charges that come with insurance, registration, maintenance and running costs.

Do your research

After settling how much you can afford to spend, you can start doing your research. And it’s genuinely important that you allow yourself plenty of time to get acquainted with the prices on the market. For instance, if you want to convey the market’s price of a car that you have in mind, try looking on the Internet for various used car ads.

If you stumble across a car whose price is much lower than the market price, you should be wary – the car may not be as good as the owner claims it to be.

Select the car

As you’re in your quest for finding the ideal vehicle, we recommend that you read plenty of reviews for the car you wish to purchase. Plus, always consider checking whether the newest model of that car is soon to be released – this can help you to haggle on the price.

Contact the seller

Now this is when all the fun begins. When you finally found the car, and you think it’s right for you and your needs, you should contact the seller. Don’t be intimated to ask plenty of questions, you need to find out as much as possible about the vehicle so that you know what you’re paying for.

Consider asking about the amount of time the seller has had the car, the reason he/she is selling it, if it suffered any accidents or serious damage, its condition and whether it will meet an RWC or not. Also, pay attention to the seller’s reactions to the questions. Body language can also indicate whether he/she is reliable or not.

If you’re buying the car from a private seller, we recommend that you meet at his/her house. The seller’s personal information should coincide with the ones on the registration certificate.

Check the car’s record

Even though you might believe that the seller is reliable and honest, that doesn’t mean you should take his/her word for it. You need to make sure that the car isn’t stolen, or encumbered. For this reason, please consider getting its VIN and check the state in which it’s registered.

Verify the car thoroughly

Besides personally checking the car, you should consider having it checked by a mechanic. This move can help you save thousands of dollars and prevent you from making a bad investment.

We recommend that you verify the car in daylight so that you can have a good look at all its possible defects – signs of rust or previous accidents. Take a good look under the car, inside the car, and at the tires. It’s equally important to inspect the engine for any signs of leaks or exhaust fumes.