It’s quite simple to determine one’s assets and liabilities until it comes to purchasing a car. Many people ask the question, should a car really be considered an asset? Or is it, in fact, a liability? This article will discover the truth about differentiating between assets and liabilities and the method in which it relates to your car. Doing so will allow you to properly calculate your own net worth.

Everyone’s net worth is calculated by subtracting liabilities from assets. Assets increase net worth, while liabilities decrease it. Unfortunately, for the majority, it often requires many liabilities in the form of loans to achieve a positive net worth composed of meaningful assets.

Assets

By definition, assets represent anything of value that you currently own. Typically, this is observed in jewelry, collectible, stocks, bank accounts, and bonds. 

Anything that can be liquidated or sold for pure cash is considered an asset. While most assets inevitably appreciate (or grow) in their overall value, not all do. Because they are worth something, assets serve to increase your net worth.

Liabilities

Anything owed to another person or bank is considered a liability. This could mean a car loan, mortgage, or credit card debt to name several examples. All of these are burdens that lower your net worth.

Owing someone money decreases your net worth. You must liquidate existing assets to pay off the debt, which reduces your take-home pay.

Should a car be considered an asset?

If we understand the general meaning behind assets, can cars be considered as such? Of course, it has value, and if necessary, you could go sell it to receive money for liquidation.

While cars have a monetary cost, they are generally not considered liabilities due to their intrinsic value. But finding how much value they do have, and how long such value lasts, is the real question.

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Should a car be considered a liability?

Many people look upon motor vehicles as liabilities because of the exponential costs necessary to maintain the car. You must pay for gas, regular maintenance, oil changes, and other expenses related to your car.

Cars are subject to insurance and repair costs, but they are generally not considered liabilities due to their value. Instead, the more accurate way to describe it in a similar sense is by understanding that it is a depreciating asset.

Depreciating assets decrease over time in their value. Cars are a prime example. For instance, there is a common saying that when you buy a new car, driving it off the lot makes it lose 10% of the overall value. Obviously, it was worth its full value at the time of purchase, but worthless as soon as you drove away with it. This is asset depreciation.

Unlike a house, the equity in a car decreases over time. As time passes, cars do not gain value, but, in fact, are worth less than what you originally paid.

But this begs yet another question–if you financed a car, should it still be considered a depreciating asset or a liability? The answer is that the car continues to remain a depreciating asset because it remains unaffected by the car loan. Other factors are responsible for determining its overall value, but taking out a loan means acquiring a liability that lowers your net worth.

Figuring out the right car to buy is a complex process because it is not a one-size-fits-all approach.

How to tell the worth of your car?

One of the most common ways to get a correct figure that matches the worth of a car is to use online blue books. They only require basic information about the vehicle and the method you are planning to use to sell, whether trade-in or private, to acquire the car’s value.

You’ll be able to quickly determine the value or selling price of the item. Avoid trade-ins as this would result in less money because dealerships pay less than they should in order to invest in repairs to make it more valuable when flipped. 

If you’d rather eschew blue books and simply tabulate standard depreciation to find the worth of your vehicle, the general rule of thumb is twofold. One, the majority of cars will lose 10% of their overall value within the first 12 months of ownership. Two, every year after, they lose an additional 15% of the overall value.

Once five years have passed, cars are worth barely 40% of their original price. When figuring the value of a car based on age, utilize the price paid for the vehicle instead of the retail price. Many customers successfully negotiate the sales price prior to buying a car. Take this figure and reduce the appreciation based on the car’s age.

Another straightforward approach is to peruse the Internet and check what others are selling for the same make, year, and model. Keep in mind that you may need to make adjustments based on location. For instance, cars sold in California tend to be far more expensive than in Florida.

In conclusion

It feels much better to consider cars an asset instead of a liability. When wondering if a car is an asset, the proper term is depreciating. This is because what a car may be worth today is not at all what it will be worth in the near or long-term future. It will always decrease, but even when buying new cars with the right loans will decrease net worth as well.

But if cars are a depreciating asset, how on Earth do car dealers make their money and have entire lots of new and used vehicles ready to sell for profit?

Car Dealerships

Car dealerships are like any other business–if they are not profitable, then they simply cannot exist. The rows of bright and shiny vehicles may prompt customers to operate under the belief that this is where the business makes the majority of its money.

In reality, nothing could be further from the truth. According to the latest data compiled from the National Automobile Dealers Association (NADA), new cars account for approximately 58% of total sales from a dealership but barely over a quart of the total gross profit. This figure not only includes car sales but also accounts for profits acquired from products in the finance and insurance (F&I) niche sold on brand new vehicles. This means things like extended warranties, gap insurance, and alarm systems.

The department of used vehicles tends to only account for 30% of total sales, but the profit is almost equally comparable to the department of new vehicles. In addition to sales from vehicles, the figure includes profits from F&I products for used cars. You may then wonder in response to this, where does the majority of profit from a car dealership come from?

The truth is, it isn’t from direct car sales, but in fact from the parts and services departments that account for the other 50% of the gross profits.

Many shoppers are wary when entering a car dealership for the fact they fail to possess enough information related to what they are going to be paying for a product. Due to the fact that customers don’t negotiate the cost of a box of cereal with a cashier at the supermarket, they tend to not expect bargain power for car prices.

Fortunately, you can navigate many of the more complex negotiations for purchases by understanding the financial aspects of the dealership business. Below are some examples.

New Cars – Holdbacks and Cash

Pricing a car is a challenging endeavor. In order to keep things simple, consumers place trust in the car’s invoice and believe that’s what the dealer actually paid for it. Next, they often wonder how dealers are profiting if they want to sell the car for the invoice price. This is where two other manufacturer sources come into play.

Holdback:

This is money received by the dealer from the manufacturer after the car is sold to a customer. Normally, it is 1 to 2% of the invoice or car’s sticker price. On a car worth $20,000, holdbacks represent anywhere between $200 to $400. This lets dealers sell the car at or even below the price written on an invoice, but still get money to cover business expenses like sales commissions, advertising, and more. 

The majority of manufacturers provide holdbacks to their dealers, but not all. While this is helpful to know, you shouldn’t try to build it into negotiations. Dealers typically do not consider this money when negotiating prices.

Cash:

To aid in moving metal, manufacturers will often provide bonus incentives directly to the dealer to help sell cars. This is referred to as dealer cash. It can often come into play at the conclusion of a model year in which both parties desire to clear out popular cars to pave the way for new incoming vehicles. Very rarely will you witness dealer cash being advertised.

Commissions

As tradition would have it, car salesmen work on commission in order to compensate beyond a base minimum-wage salary. Generally speaking, these individuals receive a cut of the gross front-end profit as part of the commission. The difference between the selling price and invoice price is typically called the front-end gross profit, which is around 20%. For example, a car sold with a front-end gross profit of $1,000 would result in a commission of approximately $200 for the salesperson.

In the modern-day, dealerships inevitably vary in the way compensation is structured for sales staff. Many will hold traditional commissions for salesmen. However, for more and more dealerships, the push to sell as many vehicles as possible remains even if it results in almost no profit. Car salesmen typically earn more money by closing more deals. Typically, these individuals have milestones to hit for higher bonuses in their paycheck made possible on behalf of the dealer.

Bonus programs play essential roles in the general picture of how much salesmen make. These are based on the total number of sold cars or survey scores from customer satisfaction. Such bonuses are based on the volume of sales instead of individual profit per vehicle and have long since remained the laymen for internet departments. This is a good reason for customers to work with them.

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Used Cars

While used vehicles account for the lowest percentage of gross profits for a dealership, trade-ins are an immense profit center for dealers specifically. Rarely do dealers actually need used cars. Rather, they are typically observed as being more profitable than new ones. Given that dealerships often personally recondition vehicles, refurbishing needs to help bolster service sales and parts.

On the purchasing side of things, used cars are difficult for customers because of the quirks in local markets that are hard to spot. It is only through dedicated research of the current market and price comparison can you know the correct price for a used vehicle.

Service Department

During the most challenging economic times, service bays have been instrumental in keeping dealerships afloat. There is always a good chance that a customer will bring their car in for regularly scheduled service, and even with thin margins, there is a consistent cash flow from the relationship.

Commissions extend to service operations as well. Advisors will normally receive commissions on the sum total of the services and parts they desire to sell. Furthermore, the amount of pressure experienced varies significantly. 

Now that you understand how dealerships make money, you’re able to move on to picking those that have proper track records on customer relationships, both as clients and buyers of the service department.