Is your car an asset or a liability?

One of the most common mistakes that vehicle buyers make is falsely identifying their car as an asset when in truth it is often a liability. While one could easily argue that vehicles are assets because they can put a decent amount of money back into your pocket once sold, on most occasions this is far from the truth. Carmudi Philippines answers the age old question of is your car an asset or a liability? Do note, however, that this requires you to thoroughly inspect how your vehicle is affecting your finances.

What is an asset and what is a liability?

Most financial experts define an asset as an investment that passively puts money into your pocket without you having to work for it. It could be anything from stocks, to real estate, to businesses and everything in between. A liability, on the other hand, depletes your bank balance either regularly or seasonally. If your vehicle is putting money in your pocket, for example, if you are an operator of a taxi cab, then it could be catagorized as an asset, although it is not always as straightforward as that. However, if it does not contribute any positive cash flow then it could be considered a liability.

Hidden costs of owning a vehicle

The reason why a vehicle is not usually categorized as an asset, despite it being a liquefiable investment (when sold) is because of the hidden costs of owning it. These expenses include fuel costs, repair and maintenance, registration, sales tax, insurance and toll fees, just to name a few. Below is the estimated cost of some of the annual car-related expenses for a Toyota Vios 1.3-Liter:  

• Fuel costs= PhP 82,125

P45 (1-Liter of gasoline) x 50 kms. average daily travel x 365 days  ÷ 10 km/L (combined fuel economy)

• Maintenance= PhP 12,000

Approximately P1,000 per month (change oil, car repairs, alignment, etc.)

• Toll Fee= PhP 66,000

P250 (two-way) x 22 working days x 12 months (depending on area)

• Parking fee= PhP 39,6000

PhP 150 (for 8-hours) x 22 working days x 12 months)

• Car insurance= PhP 11,400

LTO requires at least PhP 950 CTPL insurance per month   If you are considering a financing plan (car loans, amortizations, etc.) make sure you do your research before you buy. This is because the banks that loan you the money can re-possess your car if you fail to pay within the period set out in their terms (a few months for most banks). If you bought your Vios through a low down payment option or a low monthly promo, that adds another PhP 15,000 (approximately) to your expense column. That results in a total annual cost of: PhP 226,125 or PhP 18,843.75 in monthly expenses.

Depreciation factor

Like all things that undergo wear and tear, the price of a car also depreciates as time goes by (with the exception of a few rare or luxury car models with historical value). Most brand new car models see their greatest depreciation occur within the three to five year period after being purchased. During this time, its price can dramatically drop by 20 to 35 percent. Other factors that can contribute to a faster rate of price depreciation include the general condition of the car (if it has any dents, scratches, damages) and if there are less spare parts available in the after-sales centers.

When is your car a liability?

For most automobile owners, their car is a liability if looked at from a financial standpoint. This does not mean that you should throw away your car immediately. If owning a car takes away some of your troubles or saves you time (i.e. commuting takes more hours), then it is a worthwhile liability. However, never think of your car as an investment- very seldom does it appreciate in value. Some older car models can also be an asset at first, but because of wear and tear they can become a liability. This is generally because it does not perform the way it used to- fuel economy is down, repairs are more frequent and spare parts are hard to come by (especially if its manufacturer stopped producing this model). When you feel that your car has become a huge liability, it may be time to cut your losses.

When is your car an asset?

For every rule, there is an exception. Some cars can be converted into assets. Many people involved in the buying and selling of cars have found extra income by selling undervalued cars. Refurbishing or fixing some car models (especially vintage cars) can prove to be a great source of money when managed correctly. If your car is also used for your business operations (i.e. you use your pickup or multicab to deliver your products) and it brings in more money compared to the amount it costs to maintain it, then it is leaning towards being an asset; unless it breaks down.

Conclusion

Owning a car is a huge decision that should not be rushed simply because you have the money to buy one. Before buying make sure that the additional costs will not upset the amount you get from your current source of income.