Is a Car an Asset or a Liability?
Recently I had to purchase a new car. The old minivan had seen the last of its days. Not that it was really that old, just 12 years, and had less than 200,000 miles still, but it had some problems. First the transmission was going out. According to the mechanic at the dealer it needed to be replaced, at least that was what I was told a few years ago, when it had been slipping for a while. We decided to keep it going until it failed since the cost was more than the van was worth. Needless to say during the next few years with the constant repairs and trouble it sure seemed like a liability.
Over the years I’ve heard a bunch of different things about cars and how they are not assets because of reasons like they lose value, or they aren’t part of a business, or they don’t make you any money. All of these statements can be true, but don’t really answer the question is a car an asset.
What is an asset?
In the dictionary an asset is defined as “a useful or valuable thing”. On Investopedia they go a little further defining an asset as “An asset is anything of value that can be converted into cash. Assets are owned by individuals, businesses and governments.”
Let’s compare that with the definition of a liability.
Again, the dictionary definition for a liability is “the state of being responsible for something, especially by law.” Looking at Investopedia again on this one they describe a liability as “a company’s financial debt or obligations that arise during the course of its business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.” The same applies to individuals. Liabilities are obligations.
So back to the question, is a car an asset or a liability?
Cars fit under the category of assets. It’s a useful and valuable thing and it can be converted to cash. But what about that new car I just bought, I have a huge debt obligation on that. Because I have the debt is the car still an asset. Yes. The car is an asset, the debt, which is a separate promissory note with the bank is the liability. They secure the debt by putting a lien on my car, which is the valuable asset that they are willing to make a loan against.
Here are a few examples of asset:
- Real Estate
- Retirement accounts
- Personal Valuables
Here are some examples of liabilities
- Home Mortgage
- Student Loans
- Car Loans
- Credit Card Debt
Most all of us have assets of one sort or another. Most of us have liabilities as well. The goal, get rid of those liabilities that don’t serve a useful purpose. In business, sometimes you need to take on liabilities to expand and grow. Sure you could just reinvest the earnings, but when an opportunity arises and your business doesn’t have the cash you may take a calculated risk and take on some liabilities to make it happen.
On a simpler case, like my car, I probably could have purchased another car and avoided taking on a new loan payment and avoided the liability, but having a good reliable form of transportation has greater value to me at the present, so I took that calculated risk of taking on a new liability to purchase a new asset, the car.
That said, cars are depreciating assets, which mean they decrease in value over time as their usefulness declines. Kind of like the old van I just got rid of. It was at the end of its useful life. It was still an asset, but nowhere near the original price I paid for it over 12 years ago. And no, that car in the picture is not my new car, nice car though.