Is a Motor Vehicle an Asset or a Liability?

by Feb 27, 2020Credit Products, Financial Research

Intro

Is having a car adding value to you or costing you $$

You have been thinking about purchasing a motor vehicle, but are unsure about whether to buy new or used. It is an important milestone and there are a few things that you may need to consider before diving into the purchase.

The purchase of a motor vehicle is considered by many as acquiring an asset, but there is a school of thought that since a motor vehicle only depreciates in value, it can be considered a liability.

The Oxford Dictionary defines an asset as “a useful or valuable thing.” There is no debate that transitioning from public transportation (or relying on family and friends for transport) to jumping in your own vehicle and then travelling as you please does make life much easier. A motor vehicle then, by this definition, can be considered an asset as it is a valuable tool that is useful when you have somewhere important to go on your own terms.

An asset can also be defined as “An item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies. “ What does this mean? If you owned a motor vehicle and suddenly had a huge medical expense for example, you would have that asset available for sale so that you could meet your obligation or liability (the medical bills) UNLESS you did 100% financing (would not recommend). If you did decide to take out a loan for 100% of the cost of the vehicle – i.e. you did not make a down payment out of your own funds – if you sold the vehicle, the only place you would be paying is the bank and possibly owe them more than you can sell the car for. This is because of the fact that a motor vehicle is a depreciating asset.

In general, the moment a vehicle is driven out of a dealership, it loses 10% of its value, and by the end of the first year it loses another 10%. The value continues on this downward trajectory for the rest of the lifespan of the car. That’s staggering.  Imagine you purchased a car for $1,000,000 and by the end of the week, you decide that you don’t like the car, or another pressing issue arises for the use of the money. The most you can command for your one-week old purchase is $900,000.  You lost $100,000 just like that. That is why purchasing a vehicle requires careful research and a thorough assessment of the costs involved, especially if you are taking out a motor-vehicle loan.

A liability is defined as “A thing for which someone is responsible, especially an amount of money owed.” When you purchase a vehicle, the money spent does not end after you drive away with your new car. A vehicle requires maintenance, gas, insurance and the occasional car wash. Back to the previous example, suppose you took out an auto loan for that same vehicle for $1,000,000, your insurance premium was $50,000 and the valuation, title, registration, fitness and petrol amounted to $60,000. After one week, you owe the bank about $1,001,641 (interest is accruing the moment you receive a loan) but if you had to sell the vehicle for only $900,000 you would have ended up spending $211,641 with nothing to show for it.  That would be the price of the convenience (for that week).

The peace of mind that you would achieve from being able to drive yourself around for one week is worth something, but is it worth $200,000 or more? You have to decide. This is the extreme example, but similar calculations, assuming about $10,000 on gas a month, would result in a spend of $584,762 for the convenience of a car, if you sold it for $800,000 after one year (Remember it lost another 10%).

So although you have a physical asset that provides real value to you, if you are taking a check of your personal net worth, a car is generally a financial liability. It’s up to you to carefully decide whether the benefit of purchasing a vehicle outweighs the costs to do so.

Some tips to reduce the liability of your vehicle:

  1. Consider purchasing an older vehicle. A vehicle that’s even 1 year older will not decline in value as fast as a new car. Sure, you’re giving up the new car smell but it may be worth it.

  1. Always keep your vehicle well maintained. Your vehicle should be examined by a professional mechanic at least once a year. Ensuring that the oil filter, air filter, brake pads, tyres etc. are checked and replaced if necessary will prevent long-term, more expensive damage to your vehicle.

  1. Ensure you have adequate insurance coverage for your vehicle. In case of an accident, your insurance coverage can give you peace of mind. If you can’t get the use of your vehicle because of damage, then its real ‘value’ would be eliminated and its status as a liability solidified. Getting insurance has become easier as companies have options to start a policy and renew your auto policy online. Ensure to read the terms of your policy carefully so that you aren’t blindsided in the event you have to make a claim.

So when considering the purchase of a motor vehicle, keep in mind that your physical asset will more than likely be a financial liability but the convenience it affords may be invaluable.

Read my articles here on How to Get a Car Loan (including the loan calculator) and How to Get Auto Insurance

Happy car shopping!

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