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Have you been thinking about purchasing a car, but are unsure about whether to buy new or used?

Did you know a new car loses 10% of its value as soon as its driven off the lot?

Is a car an asset or a liability?

A thread

#FinanceTwitterJa
The purchase of a motor vehicle is considered by many as acquiring an asset, but there is a school of thought that since a motor vehicle only depreciates in value, it can be considered a liability.

An asset is defined as “a useful or valuable thing.”
1/
There is no debate that transitioning from public transportation (or relying on family and friends for transport) to jumping in your own vehicle does make life much easier. A motor vehicle then, by this definition, can be considered an asset as it is indeed a valuable tool!

2/
An asset can also be defined as “An item of property owned by a person or company, regarded as having value and available to meet debts or commitments“ What does this mean? If you owned a car & suddenly had a huge medical expense, you would have that asset available for sale.. 3/
.so that you could meet your obligation/liability (the medical bills) UNLESS you did 100% financing. If you decided to take out a loan for 100% of the cost of the vehicle – i.e. you did not make a down payment out of your own funds - the only place getting paid is the lender. /4
100% financing for a car is risky as it could lead to you possibly owing the lender more than you can sell the car for. This is because a motor vehicle is a depreciating asset i.e. the asset decreases in value over time.

5/
In general, the moment a vehicle is driven out of a dealership, it loses 10% of its value & loses another 10% by the end of the first year. The value continues on this downward trajectory for the rest of the lifespan of the car.

6/
Imagine you purchased a car for J$1 Mil & by the end of the week, you decide that you don’t like the car, or another pressing issue arises for the use of the money. The most you can command for your one-week old purchase is $900k. You lost $100k just like that. 7/
That is why purchasing a vehicle requires careful research and a thorough assessment of the costs involved, especially if you are taking out a motor-vehicle loan. I have some information on this on my blog here: financialcentsibility.com/steps-to-getti…

8/
A liability is defined as “A thing for which someone is responsible, especially an amount of money owed.” When you purchase a vehicle, the money spent does not end after you drive away with your new car. A vehicle requires maintenance, gas, insurance & the occasional car wash. 9/
Back to the previous example, suppose you took out a loan for a car for $1M your insurance premium was $50k & the valuation, title, registration, fitness & gas amounted to $60k. After one week, you owe the bank about $1,001,641 (interest is accruing from day 1) 10/
But if you had to sell the vehicle for only $900k you would have ended up spending $211,641 (interest +expenses) with nothing to show for it. That would be the price of the convenience (for that week).

The convenience is worth something, but is it worth $200k?

11/
This is an extreme example, but assuming about $10,000 on gas a month (and no major repairs), similar calaculations would result in a spend of $584,762 for the convenience of a car, if you sold it for $800,000 after one year (Remember it lost another 10%).

12/
So although you have a physical asset that provides real value to you, if you are taking a check of your personal net worth, a car is generally a financial liability. It’s up to you to carefully decide whether the benefit of purchasing a vehicle outweighs the costs to do so. 13/
Some tips to reduce the liability of your vehicle:

A. Consider purchasing an older vehicle. A vehicle that’s even 1 year older will not decline in value as fast as a new car.

B. Always keep your vehicle well maintained.

C. Ensure you have adequate insurance coverage. 14/
In case of an accident, your insurance coverage can give you peace of mind. If you can’t get the use of your vehicle because of damage, then its real ‘value’ would be eliminated and its status as a liability solidified. Getting insurance has become easier these days!

15/
So when considering the purchase of a motor vehicle, keep in mind that your physical asset will more than likely be a financial liability but the convenience it affords may be invaluable.

Visit my article on this here financialcentsibility.com/is-a-motor-veh… #financetwitterja 16/
The 10% loss in value wont be the case for every car. Its a general estimation. Some cars hold value much better than others. Some cars it will be less than 10, some it will be more!
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