Why is a car considered an asset?
February 4, 2018 3:38 PM   Subscribe

I've been thinking about getting a car, but I hate the idea of being married to a big hunk of metal. I found a service that will basically rent you a car on a long-term monthly basis. But in reading up on it, the major criticism seems to be that you pay a bunch of money but you never get the ownership of the physical object. But in my experience the actual car is more of a liability than an asset. Is there something I'm missing?

I consider a car more of a liability than an asset. It breaks, rusts, gets stolen, costs money to park, and loses value over time. I guess you can use it to get a loan, but I'm not anticipating ever needing to that. And as someone who lives in a metropolitan area, it barely fits into my residential arrangement today and may not at all fit into my next one. So as a physical object I could need to ditch it at any time. It's not like I live in a permanent house where I'm always going to be able to accommodate it.

My question is, other than as collateral for a loan, why is having ownership of your car considered an asset?

For clarification, I'm also not talking about traditional leasing arrangements.
posted by bleep to Travel & Transportation (20 answers total) 1 user marked this as a favorite
Because you can sell it; it has market value. And — critically — unlike a long term lease, you’re free to sell it at any time. (You’ll still have to pay off any loan from the proceeds, though.)
posted by chesty_a_arthur at 3:41 PM on February 4, 2018 [3 favorites]

Because you can sell it for money.
posted by Huffy Puffy at 3:41 PM on February 4, 2018 [9 favorites]

I don't think you're wrong to call it a liability. I own one, but it's a very expensive convenience. Between the taxes, registration and insurance fees, and the maintenance and repair costs, it's really costly.
posted by Kirth Gerson at 3:43 PM on February 4, 2018 [1 favorite]

But a giant hunk of gold would be a financial asset, and that doesn’t mean I have a good place for it. A car might not be a good deal for you personally, just like equity in a house isn’t everyone’s financial jam. And that’s fine!
posted by chesty_a_arthur at 3:44 PM on February 4, 2018 [6 favorites]

Yeah, it's an asset because it's a thing that you can sell for a positive value. You're right that there are lots of costs of maintaining the asset - parking, gas, etc., but that doesn't mean the car itself is a liability.

Sometimes people have a negative reaction to renting/leasing because of the idea that you "lose" the value of your payments because you don't have an asset to sell when the rental/lease is done. I don't think that's always a valid view - it depends a lot on the terms of the rental as compared to buying, etc. - but it's a common knee-jerk belief.
posted by Mid at 3:53 PM on February 4, 2018 [1 favorite]

The only real question here is whether renting the car long-term is going to cost you more than buying a car. My suspicion is that this sort of rental arrangement makes sense for people in very specific circumstances (academics on sabbatical or something) and is a losing proposition as a substitute for owning a car for an indefinite period. You'd obviously have to run the numbers, but someone else being the actual owner of the car doesn't relieve you of much of the cost of ownership. It does give you a way to get rid of the thing quickly. (Then again, so does CarMax, though you'd get more money selling to an individual.)
posted by hoyland at 3:58 PM on February 4, 2018 [1 favorite]

The aspect of the Asset vs. Liability distinction that seems to matter the most here is that if you purchase a car, your cost of ownership will decrease over time as long as you're able to maintain the car properly and it continues to meet your driving needs.

So if you're facing a choice between buying and some other choice, it makes sense for a lot of people to invest more up front and then reap the benefits of that upfront expenditure every year that the car is kept after it's paid off. To use a personal example, we paid cash for a 2008 model car that we still own and expect to continue to own for another 5 years or more. The cost of annual maintenance is on the order of $500 or less when spread out over the life of the car, including tires, regular servicing and oil changes, and the rare repair.

Over many years, your total transportation costs may end up being significantly less as an owner; that's not uniformly true, though, and making dogmatic distinctions between "assets" and "liabilities" doesn't answer the critical question about what's going to make the most sense for your budget and lifestyle over the long term.
posted by MoonOrb at 4:03 PM on February 4, 2018 [2 favorites]

I'm more familiar with leasing where things like breaking, rusting, stolen etc. are still your risk (the company charges you for excess wear and tear when you return it). If this is true in your case, the real financial difference is that in one case you pay a bunch of money upfront and you have the option of selling it (for less than you paid for it but still getting real money) whenever you want versus paying a set amount per month with nothing coming back to you at the end.

My rule of thumb - the company is offering to do this because it is profitable for them, on average. So the deal is set up so that the amount that you pay plus the value of car at the end means that they are making money off of you or they wouldn't do it. It might still make sense for you - if here is something special about your situation when either the "average" math doesn't apply or you place a heavier weight on uncertainty or flexibility that the simple math would indicate.
posted by metahawk at 4:08 PM on February 4, 2018 [1 favorite]

It very much depends on the use case. I used to own a car and drove about 30k miles per year. At the time I used to live in a region with less than brilliant public transport network and I had to cover a large geographic area for work, without having the kind of job that comes with a company car. Ownership was beneficial at that point even after tax and insurance. And it would have been impossible to get to where I needed to get to without a car.

Then I moved to another country for work, lived without car for a good 5 years and relied largely on public transport. That worked because public transport here is excellent and I was fortunate with where my clients were based. Then I found myself having to cover a lot of ground again, less good connections and also, we had to use a new tool that required web based working and tunnels and mobile data do not play nicely so I could no longer work efficiently on the train. So I found myself using the local car sharing scheme so much that I was given volume discount...I figured that I had probably reached a level of car use again, where ownership might make sense. And I’d get a nicer car than the ones the car sharing peeps had. So I bought a car again and got plenty of use out of it, was able to cover the running cost with mileage claims. Guess what, my role at work has changed again and I now drive less frequently but I do drive fairly long trips about 1.5x/month. My mileage claims for these trips more than pay for my car, not just running cost but also depreciation. The car is costing me nothing and is saving me a lot of time.

So it really depends on your circumstances.
posted by koahiatamadl at 4:29 PM on February 4, 2018 [5 favorites]

When I lived in a larger city with good transit, a bike path system, and all my daily needs within walking distance, I used a car share service (basically renting a car that lived on my block for only the hours I used it). Since I only needed a car about once a month, this was way cheaper than owning a car would have been, even if I could have gotten a car for free, and way more convenient since my house had street parking where the vehicle would have needed to be moved every 24 hours. Everything was included in the rental fee: maintenance, registration fees, a parking pass, insurance, gas money, etc. Now that I live in a rural area and own my own car, the auto insurance for the year alone is more than I paid for renting the car share car as much as I needed it all year!
posted by abeja bicicleta at 4:36 PM on February 4, 2018 [1 favorite]

It's just accounting terminology. Anything you buy and can sell later is an asset, including cash money, retirement accounts, a car, house, TV, fancy hat, etc. A liability is a claim on one of your assets, like a car loan.

Things like car repair, or car rental for that matter, aren't an asset (because you can't sell them) and aren't a liability (you haven't made any commitment to buy them in the future) -- they're just an expense, like buying anything else intangible.

A car loan is a liability, but it's balanced out by the car itself, which is an asset. Hopefully the car is worth more than the car loan, so the whole thing together is an asset. (Otherwise you're upside-down on your car loan and would have to pay money to sell the car -- fortunately this is rare.)

A standard car lease is clearly a liability though since you have to pay it until the lease term is up.

Most people don't really track their personal assets and liabilities. But in a situation where you need a lot of cash, like a bankruptcy, illness, or retirement, it does matter.
posted by miyabo at 5:21 PM on February 4, 2018 [9 favorites]

I went through recently this because I don't really need a car, I don't like cars or driving, and owning one is kinda stupid, and having one in a city is even stupider. For me it came down to two things.

Monthly cost of ownership (urban parking spot, cheap pay-by-mile insurance, gas, etc) was about the same as what I was currently spending on car shares / taxis. I needed the car shares for work, and it was kinda a pain scheduling sometimes as car sharing is very popular in my neighborhood.

The other reason was at the time I had more cash than I really needed as an emergency cushion in savings. So since you can't drive a savings account, and a car can easily be turned back into cash, I figured I might as well own one. So I bought a reliable used one in cash.

I would not have bothered if: I had not already had a parking spot at my building lined up, I had not had the cash on hand, or if I weren't already spending a not insignificant amount of money on car sharing already.
posted by bradbane at 5:28 PM on February 4, 2018 [2 favorites]

The value of a car goes beyond its Kelley Blue Book value. Which is good because, on paper, my old Camry with 175K miles is worth $1K, if that, but its worth to me is much greater. I walk and bike when I can but the public transportation system here is very limited. My car is reliable and convenient for hauls big and small, and enables me to go spontaneously on trips near and far. I don't need it to get to work but am glad to drive when the weather is particularly bad or I'm running late. However, I can park for free at work and at home; it's on-street at home but fortunately there's always a spot nearby. I love my car and the freedom and convenience it offers me! Having a car that you can lock gives you greater privacy and safety, especially as a woman; I hardly think about this anyone but it becomes painfully clear when I'm on my bike waiting at an intersection in the summer. It shouldn't be this way but so often is, unfortunately.

That said, I had happily lived for years without one: if I were to live in a place with amazing public transportation and/or parking was expensive and limited, I would just take public transportation and use taxis or rent a car as needed. By this I mean for a few days, not a few months or years because I, too, have heard all the advice not to rent one long-term. In a city, a forty minute commute by bus or train is much more pleasant than a forty minute commute by car but plenty of people could feel the opposite. One reason I have kept my old car and not bought a new one yet is what you mention: it's necessary for my current life but not necessarily my next location, and it sucks to pay a lot and then have to sell it after a year or two. Fortunately, should you decide to buy one, you have a lot of options -- it need not be expensive new car versus no car. I'd talk to neighbors and coworkers who have cars in your area and see what their experiences are like because they could probably give you the best advice.
posted by smorgasbord at 7:46 PM on February 4, 2018 [1 favorite]

Not every asset can be sold for money. Good will for example. A car is only an asset if its value exceeds it cost. If you are upside down on a loan, it is a liability. If the cost of your loan plus the insurance, etc exceeds the value for which you could reasonably sell it, it would be a liability too or at least an expense on an income statement. You can have things that are expenses on an income statement be an asset on a balance sheet. And vice versa.

I think there are people that get some intangible utils out of owning certain cars too. If you do not feel a car is an asset, then don't buy it. It is that simple. I rented a car from Hertz for a few months at a very reasonable rate. It made sense. I did not want to be burdened with a lease or with ownership and then having to sell. I was new to the area and was still trying to figure out the best situation for me. Liquidity was a benefit to me such that renting for slightly more than a lease or a car payment would have been had value and made it "worth it" to me.

I also have a friend who buys cars that are considered "totals" by the insurance company and parts them out for more than the cost of the car. So, there may be a hidden asset in the car if you go to sell it and are willing to piece it out.

If you are only using the car for short periods of time, it could definitely be cheaper to rent than to own. The principle holds regardless of your financial situation. I have a different friend who flies private about 10 times a year. He always rents. I asked him why he did not just buy a G-4, gas it up, and go. He said what you said pretty much. Why deal with the insurance, the maintenance, the etc when for less than the annual cost, he could charter one whenever he needed it.

The point is that not every asset is worth it to any one person either. Yes, he could probably sell it for more than the loan on it, but why when he could just rent and stay liquid?
posted by AugustWest at 8:27 PM on February 4, 2018 [1 favorite]

It breaks, rusts... costs money to park, and loses value over time.

I've got a car and all these things are true, but it's an asset because I could put an ad on craigslist and sell my car tomorrow if I want to. If I didn't have a use for a car though, the maintenance costs would mean I'd be better off investing the money or buying good walking shoes (even though it's far easier to sell a used car than a used pair of shoes).

A car is a depreciating asset -- it's not an investment. Perhaps you are confusing assets and investments.

gets stolen

That doesn't make it not an asset -- no one wants to steal your liabilities and pay them for you! Generally people steal things because they are worth something.

It sounds like you wouldn't use a car very often, so it might make more sense for you to rent one whenever it is needed instead of on a monthly basis (unless you will need it all month). You won't have to worry about it getting stolen or parking somewhere when you don't have it.
posted by yohko at 8:36 PM on February 4, 2018 [1 favorite]

How often are you going to be driving? Have you looked into zipcar?
posted by sexyrobot at 3:39 AM on February 5, 2018

What I would do in your situation is try to compare the cost of the two alternatives. For me (living in the 'burbs, absolutely needed for the foreseeable future, and little to no chance I'll ever be where I can't park my car), car ownership is absolutely the way to go.

what the criticism of any kind of "rent when you could buy" situation (cars, houses, expensive tools or toys) really boils down to is that you generally pay more for the use of the thing. The residual value of the item once it's used is not something you get the advantage of when renting. So if you buy a car when it's worth $15,000, drive it for 5 years, and then sell it for $5,000, you only effectively spent $10,000 (plus interest and/or adjusting for inflation). Part of the rental cost is that they presumably pay for maintenance and repairs, so you'd have to adjust for that to make a fair comparison as well.

BUT - having been in a number of jobs where I had to do a lot of traveling for business, I'm convinced that figuring out costs with cars is a more complicated business than most people realize. It's a heady mix of fixed costs (cost of ownership, financing, insurance (for the most part)), variable costs (gas, oil changes, tires, and most regular repair jobs like brakes) and relatively random costs (you may or may not wind up having a transmission go out, for example)

Moreover, not all costs show up neatly on the spreadsheet. If you're in a volatile situation where you anticipate moving a lot, may or may not need a car in the future, etc. - the premium you pay for renting may be worth it for peace of mind - you can simply turn it in and dispose of it quickly.

If I lived in a situation like yours, I'd probably either do a long-term rental or buy something that was pretty well-used and low-cost (on the grounds that if I had to sell it quickly I wouldn't lose as much).
posted by randomkeystrike at 5:55 AM on February 5, 2018 [1 favorite]

I think you're mixing up the common usage of the word "liability" with the accounting term. Everyone's explaining the meaning of the accounting terms, but you're not really thinking about the accounting liability; you're thinking about the emotional costs.

Financially, in the long run, it's cheaper to buy the car and then pay to fix it when it breaks, than it is to lease it.
But personally and emotionally it is be more _hassle_ to own the car, which is what you're thinking of as a liability. You have the hassle of selling the car if you can't park it any more, or if it gets too old and rusty. You have have the risk of a sudden repair bill that you hadn't budgeted for. That hassle is what you can pay the lease company to take away from you (if you get the fancy maintenance contract).

But ultimately if you own the car and you're not upside down on a loan you can still go "turn it in" at we-buy-any-car or the scrapyard or wherever and be rid of it pretty much instantly. And you can chuck some money in a savings account every month as cheaper form of maintenance contract if you're worried about surprise bills.
posted by quacks like a duck at 6:01 AM on February 5, 2018 [1 favorite]

Someone else said it, but a car is a depreciating asset, which means it's value decreases over time. Liabilities are not just expenses, but rather expenses that lose their intrinsic value after you discontinue using it. For example, renting an office is a liability because at the moment you stop paying for that space, the value is completely lost. A mortgage on the other hand is an asset because you earn equity with each payment and can sell the space in exchange for liquid assets.

A car on the other hand has value that can be converted into liquid assets. If you buy a car in 2017 for $20,000, it will be worth say, $17,500 in 2018, but you can still sell it and convert the car into cash.

Another food for thought is I typically buy newer, fully loaded, certified pre-owned cars (Like one model year below brand new). Then I take out longer term loans, make my payments, and sell the car after a few years. In one example, the loan's value was say $8000, but I was able to sell the car for $10,000, giving me $2,000 of positive equity, which I turned around and used as a down payment for another car. All the benefits of a lease without the mileage restrictions, and better management of cash flow =)
posted by FireStyle at 8:10 AM on February 5, 2018 [3 favorites]

A car is like any depreciating capital: you use it to create value for yourself because it gives you access to your job and other things you would otherwise have to pay someone else to access. The expenses are both depreciation, maintenance, and operating costs.

Let’s say you own a car outright. There is a cost per mile of using it every year. That’s not just gasoline and insurance, but also maintenance. Let’s say I spent $1200/yr on insurance, $1000/yr on gas, and $2000/yr on repairs (aging European car) and I drive 20,000 miles/yr. That means I am paying 21 cents per mile. Maybe selling that car for a few thousand dollars and leasing one might be a better deal (probably not). Maybe transit + car sharing is a better deal. Maybe the psychic benefit of not being stranded in the side of the road is worth another amortized $100-$200/month it would cost to have a newer car.

A car isn’t an “asset” like savings or an investment. It is a capital good that creates value for you in terms of access to your job and other services that you would have to pay for in some other way if you didn’t have it.

Generally, rentals or leases provide some benefit above owning (flexibility, access to a brand new car at a lower monthly cost than you would have otherwise) that allows who provide those cars to charge a premium over ownership.

Look up “total cost of ownership” of a car and then you can see how it compares with your desire to rent one rather than own one.
posted by deanc at 8:59 AM on February 5, 2018

« Older Is it possible to have ADHD as an adult but not...   |   To Vancouver... and beyond! Newer »
This thread is closed to new comments.