Inflation and interest rates are making it increasingly difficult for consumers to afford car purchases. However, Tesla has come up with a solution that resembles a mortgage – extended car loans.
According to its website, Tesla is now offering car loans with terms as long as 84 months. While the concept of an 84-month loan is not new, it is certainly uncommon. In September, the average new car loan term length for borrowers with prime credit ratings was approximately 70.5 months, according to Experian, which is consistent with pre-pandemic levels.
It might be wise for buyers to consider the benefits of longer loan terms. For instance, a $50,000 Tesla Model Y with a $5,000 down payment, a 6% annual interest rate, and an 84-month term would amount to a monthly payment of around $650. This is more than $100 cheaper per month compared to a 70-month loan and more than $200 cheaper than a 60-month loan.
Tesla has not provided an immediate response regarding inquiries about its loan conditions.
Lower payments seem to be a necessity across the entire car industry. In the second quarter, a record-breaking 17.1% of people who financed a new vehicle purchase were paying more than $1,000 a month on their loans. This figure has increased from 16.8% in the first quarter and a mere 4.3% in the second quarter of 2019 before the pandemic, as reported by automotive-data provider Edmunds.
Car Buyers Shifting Towards Cash and Third-Party Financing
According to Edmunds, a significant increase has been observed in the number of car buyers who are paying cash or utilizing third-party financing instead of opting for leases or dealer loans. In the second quarter, approximately 26% of new car buyers followed this approach, which marks a substantial rise from the pre-pandemic figure of less than 20%. This emerging trend signifies a shift in consumer preferences.
Escalating Prices Impacting Demand
The average transaction price for new vehicles soared to around $49,000 in June 2022, as stated by Kelly Blue Book. This amount is considerably higher compared to the average of approximately $37,000 recorded in June 2019. Consequently, the escalating prices coupled with increased interest rates have adversely affected the overall demand for new cars. The current annual purchase rate stands at about 15 million units, a drop from the pre-Covid-19 rate of around 17 million units.
Unique Strategies Adopted by Tesla
Tesla, as an automaker, has become synonymous with setting unprecedented trends. Among these unconventional initiatives is its groundbreaking mass-market electric vehicle (EV) concept. Moreover, Tesla surprised the market by reducing prices on certain models by up to 25% in 2023. Another remarkable move made by the company was opening up its supercharging network to non-Tesla drivers, starting with a collaboration with Ford Motor (F) in May.
Introducing Longer Loan Terms
Building on its list of distinctive actions, Tesla might be on track to popularize 84-month loan terms. The impact of this decision remains uncertain and only time will reveal whether it will further elevate Tesla’s stock value. Notably, Tesla’s shares have already surged approximately 118% year-to-date, while the S&P 500 and Nasdaq Composite have recorded gains of about 19% and 36% respectively. Throughout Tuesday’s trading, Tesla’s stock remained flat, whereas shares experienced a more than 3% increase on Monday.