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“Is my car an asset?” might be a question you've asked and have heard differing opinions. Some view cars as an asset, while others view them as a liability. Do you include your car in your net worth calculation, and how do you know what your car is worth? We'll discuss these questions in this article.
The short answer is, yes, your car is an asset. However, it is a depreciating asset, which means it loses value as time passes.
Let's jump into this topic.
What is an Asset?
An asset is something of value, an object or resource that can be sold or exchanged. Examples of assets include your home, stocks, bonds, and cash. If you run a business, your business has assets that include inventory and equipment.
Assets can be sold, or liquidated, for money. Most assets gain value, or appreciate over time, and are added to your net worth.
What is a Liability?
A liability is a debt that you owe to someone else. When calculating your net worth, liabilities are subtracted from assets, and the difference is considered your total net worth.
Examples of liabilities include credit card debt, student loans, or auto loans. Liabilities include a set amount of money that you are obligated to pay back.
Is My Car an Asset?
A depreciating asset is something you own that loses its value over time. As cars age, their value decreases, which makes cars a depreciating asset. It is unlikely that you'll sell a car for more money than you bought it for.
But, because cars do have value, they are assets and not liabilities. Some may argue that cars cost money to maintain, such as buying gas, doing oil changes, rotating the tires, and so on. However, despite this, cars are still depreciating assets as they have value, albeit value that decreases over time.
Is My Car an Asset if I Have a Loan on it?
If your car has a loan on it, it is still a depreciating asset. In this case, the car loan is a liability. So even if you sell your car and the car loan has a higher balance than the value of your car, the car itself is still an asset, and the loan is a liability.
What Is My Car Worth?
There are a few ways to determine the value of your car. Remember, as a depreciating asset, the value of your car decreases over time. To get a rough idea of what your car is worth, first take the car's purchase price when you bought it new.
- After one year, subtract 20% from the purchase price to get the value.
- For years 2 through 9, subtract 15% additional per year from the previous year.
- Note: In your car's 5th year, it's worth approximately 40% of what it was worth when it was purchased new.
- After the 10th year, depreciation slows down to about 1-2% per year, where in the 10th year, your car is worth approximately 20% of what it was worth new.
You can use a website like Kelley Blue Book (KBB) to get an idea of how much your car is worth. KBB will ask you for information about your car and give you a value based on whether you plan to trade or sell your car privately.
Additionally, with KBB, you can get an instant cash offer where participating dealers in your area will buy your car from you if you're looking to sell it. You won't get as much money for your car selling it in this manner, but you'll be able to make the sale in a matter of days versus potentially waiting weeks for a private buyer to come along.
Should I Include My Car in My Net Worth?
Your car should be included in your net worth. However, you'll want to keep the value updated. Since your car is an asset that loses value, you'll want to adjust the value down over time.
How Does a Car Loan Affect My Net Worth?
Your car loan lowers your net worth as it's a liability. When determining your net worth, add your car's current value as an asset and the current balance of your auto loan as a liability.
For example, if you have a car valued at $20,000 and an auto loan with a $14,000 balance, you would add $20,000 to your assets, noted as your car, and you would add $14,000 to your liabilities, as your car loan.
You would then subtract $14,000 from $20,000 to see how much your net worth changes by. In this case, your car would raise your net worth by $6,000. Then, each month, you subtract the principal paid on your auto loan from your auto loan balance, and periodically, roughly once a year, you would update the car's value based on that year's estimated depreciation or by using KBB.
Wrapping It Up
In this article, we answered the question, “is a car an asset?” and then discussed that a car is a depreciating asset, which means your car will lose value over time.
As cars lose the most value in the first five years, it may make sense to buy preowned or used cars so that you spend less money on cars overall. Here's a follow-up article on the question, “should I buy a used car with over 100k miles?“