First-time Auto Buyer Quiz: Is Your Car an Asset or a Liability?

A car is more than just a vehicle or mode of transportation. It is a symbol of freedom, independence, and personal style. It is not just a piece of metal and moving parts that bring you from one place to another. A car is a good emblem of your vision for your present and future, a representation of how far you’ve come, a banner that declares that you are in control of your direction as you pass through life’s highways.

But for many, owning a car still seems to be a distant dream. After all, the average price of a basic model car is around $38,000. This amount may be nothing to a millionaire but remains hefty for the average American graduate who may also likely have to pay for student loans. For those with a stable job, the most common technique they use to pay for a car is to arrange for a car loan auto-debit from the savings account. This account is also usually where an individual’s payroll is deposited, making it convenient to pay regularly for a car loan.

But how about a 20-something who wants to buy and own a car, using his own effort and money? What can he or she do when income is not enough to buy a car outright with cash? Is it really worth owning one’s own vehicle?

Your Car: Asset or Liability?

First, it is important to understand that a car could either be an asset or a liability. In the simplest terms, an asset is something that puts money in your wallet. A liability is something that takes money from your wallet. Many people think that a car is an asset when technically speaking, it is a liability. In general, a car loses its original value by 10% as soon as it is driven out from the dealership. The car again loses another 10 to 20% of its original value after its first year of use. This is what is called car depreciation. In addition, a car constantly needs a gas refill, and periodically needs to have an oil change and other lubricants. If you drive it around time and you have to pay for parking, again it takes money away from your wallet.

However, it can be an asset if you use it in the way you originally intended but you also generate income from the car. For example, if you use the car as a private transport service vehicle and get paid, it may be considered an asset since it already generates cash flow. This is especially true when the income from the use of the car is used to pay off the monthly amortizations of the car loan. For a fully paid car, using it to generate income is much even better since the money earned could compensate for the exact amount of funds used to buy the vehicle.

Choose the Right Car

man inside his car

Now that we have understood what makes a car an asset or liability, let’s see how one can choose the right car. The most common advice is choosing a vehicle is to know the primary reason for its use. Do you need a car for city driving from the home to the office? Are you in need of a vehicle that can carry many passengers? Or maybe a platform that allows you to haul cargo like a truck? It really depends on what you will use it for. A car is more suitable for comfortable city driving and if the roads you will tread are cemented or made of asphalt. For long road trips that will include rough terrain, a sport utility vehicle or truck may be the more appropriate make of the vehicle you need. If you travel around with many people, a van is the best design for that purpose.

After settling for the make of the vehicle you need, the next logical step is to set a budget. Can you afford a brand-new vehicle or is a second-hand car an acceptable option. A brand-new car may seem to cost more upfront but it will make up for performance, car features, and market value. A second-hand car may be more affordable but it may entail additional costs later on especially if it is not well-maintained and needs a lot of periodic repairs. Buying a second-hand vintage car, however, is a different story. Collector’s cars are often very well-maintained with all original parts, making them actually gain in market value despite their age.

Financing

There are three main ways to finance a car. First, the self-finance option means that you have the entire amount ready for full payment for any car that you want. Second, you can take a car loan from a bank but make sure to read all the contract details especially about the interest rates and life of the loan. The third way is to have the dealership itself offer a deal which is usually lower than what one can get from a bank. Remember to always read the fine print in any loan contract. Clarify the provisions about interest rates, monthly payments, and car insurance.

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