Things are not always clear when it comes to working out personal finances. Questions often have multiple answers and experts have an unhelp habit of disagreeing.
You may have had trouble trying to find the answer to this question:
Is A Car A Financial Asset Or Liability?
Today, we are going to give you a definitive answer to that question. As well as, talking you through the different ways owning a car can affect your personal finances.
Is A Car An Asset? If So, What Type Of Asset Is It?
The short answer to this question is, yes a car is an asset.
What type of asset is it? Well, a car is technically a tangible asset with depreciating value. That means that the longer you have owned your car (i.e the older it is) the less it will be worth.
It is worth noting that cars depreciate in value much faster when they are new. So, if you are looking for a more solid asset, you should buy second-hand rather than new.
Please note that a car is only an asset if you own it. If you are loaning it then it is classed as a liability.
Can Your Car Be An Asset For Your Mortgage?
Yes, if you own your car then it can be used as an asset for your mortgage.
Other tangible assets that you can include on your mortgage application are boats, RVs, jewelry, artwork, and sculptures.
Again, please note that if you rent your car you cannot count it as an asset. And as a liability, it may harm your mortgage application. The same goes for any other rented vehicle.
What Makes Your Car An Asset?
Well, if we look at Investopedia’s definition of an asset:
‘An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit…
An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent.’
We can clearly see that a car meets this definition when you own it. You can convert it into cash at a later date if needed and it reduces your expenses by saving you money that you would otherwise be spending on public transport.
So, why do so many people believe that cars are liabilities rather than assets?
Well, a lot of this has to do with the fact that cars depreciate in value.
Vehicles are a pretty unique tangible asset, as they have value outside of their monetary value. Most people buy their cars because they want to be able to use them. Rather than buying them so they can sell them on like one would with a piece of art.
Therefore they can add value to our lives, even if they aren’t worth any money.
However, there aren’t many over assets that people would invest in if they knew they were going to lose money in the process. Art or stocks that consistently depreciate in value may be seen as liabilities rather than assets.
As we have mentioned already, renting a car is a liability rather than an asset. Much like other forms of debt or a rented flat would be considered a liability. As you are paying in more than you are getting out.
Summary – Despite their depreciating value, most banks would consider cars an asset.
Can A Car Have Negative Effects On Your Personal Finance?
We have established that cars are an asset in the eyes of a bank or financial adviser.
However, that doesn’t mean that we agree having a car will always have a positive effect on your finances.
Owning and running a car is expensive.
Firstly you have to pay out for the car with a lump sum of money. You will either have to save up for this or take out a loan to do so. If you are looking to keep your finances healthy then you should avoid taking out a loan to do this.
Secondly, you have to insure your car. This is an essential and unavoidable part of owning (or renting a car). This can be expensive, particularly if you are a young or new driver.
Thirdly, you have to pay to maintain your car. This can include replacing tires, paying to have your car serviced, paying to have it cleaned, and much more. These costs can rack up over the years, particularly if you have to do a lot of driving.
The final expense that comes with owning a car is having to pay for fuel. When oil prices shoot up this can be a very expensive endeavor.