But credit cards aren't the only problem. There's another mind-blowing stat that has to do with debt that we want you to know about. Did you know that 17% of trade-ins for new vehicles have negative equity? Meaning someone is trading in a vehicle that they owe more than the vehicle's worth, and they're just rolling it in, rolling it in, rolling it in. So, on average, these folks trading this in owe $5,341 of negative equity that they're rolling into a new loan. If you're doing that, you're never going to get on sound financial footing.
So, you asked me, did I realize, and here's what I didn't—I didn't. That stat did surprise me. But then, I think about all the people that live around me and stuff, and you just can't help but notice in your neighborhood if you live in a large neighborhood that if you start recognizing who drives what cars. At this stat, it's almost one in five people are having negative equity, and I'm like, 'Yeah, all these people that I see seem like they're flipping cars every two to three years.' I'm like, 'Whoa, that neighbor already has a new car. Didn't they just buy a new car 18 months ago?' So, this is, there's the only way this happens is either you have limitless pots of money, but if you were flipping cars every few years, more than likely you're potentially building up some negative equity or are you're—negative equity, because equity is a positive. I'm going to say you're just—you're just building a deeper debt is what you're doing, and it's rolling into and you're never actually owning the cars that you're driving.
So, why does this happen specifically with automobiles? It's because automobiles depreciate so quickly. Cars, on average, lose nine percent of their value the moment that you drive it off the lot, and they can actually lose up to 60 percent of their value on average in the first five years. So, if you are buying new, trading in, buying new, trading in, all you are doing is accumulating all of that depreciation. It is going to be very, very difficult for you to get out of that hole if you continue making that poor financial decision.
And what's expanding, you know, really compounding this problem is the fact that the average car loan now is 69 months. Well, if you just, if you take into combination fast appreciation plus spreading out how fast you pay this down, you know you're going to be underwater on this thing really quick. And what's crazy to me is I look at luxury cars—not to go on a luxury car rant, but it is one of those things. No, I'm not, I'm not, I'm not. But it is one of those things.
I was watching a YouTube video because you can get a lot of education, and this person was talking about how Range Rovers depreciate like 85% over six years. BMW and Audis were like 70% over that same period. Lexus—you know, because, once again, Acura and Lexus, people are living their best life in that luxury quasi-luxury thing—they kept like 50%. And the reason was a lot of these vehicles have horrible maintenance costs, meaning that once you get outside the manufacturer's warranty, these repairs aren't like a few hundred bucks to change brake pads or the tires and stuff like that.
I'm talking about like engines locking up. I'm talking about transmissions going out. So pay attention to that stuff that you need to think about. Cars, not only in how it's going to make you feel or what you perceive you will feel about driving this, but actually, what is this vehicle going to do for you on reliability on your finances? A lot of these things are really interconnected. Yeah, it's one of the reasons why we came up with a whole 23/8 idea. Because if you can follow 20/3/8
, there's a really good chance you're going to prevent yourself from being in the situation where you are underwater on your automobile, where you are one of these people rolling in the negative equity. So, if you can follow that through, you're likely going to set yourself up on sound financial footing. If you want to know more about that, we have an entire car-buying checklist that you can go check out, moneyguy.com/resources
. You can actually check that out to make sure that when you do purchase your automobile, you're doing it the right way. And remember, 20/3/8
is also for entry-level vehicles. It's not for luxury, luxury vehicles. You need to pay same as cash. And then it's also one of those things where I always, I just want to remind people, it's much better to actually be rich than just to look rich. So that's why I want you to have reliable transportation because that's very important, especially if it's needed to get you to your job and other things that are going to create the foundation to your wealth. But it is not something that you use 20/3/8
to bridge a bad decision. I love it.