By Tesla is introducing a solution for consumers struggling with the impact of inflation and high interest rates on car purchases. In an effort to make their vehicles more accessible, the auto maker is now offering car loans with terms as long as 84 months, similar to a mortgage.
While Tesla did not originate the concept of an 84-month loan, this longer term is not typically seen in the auto industry. According to Experian, the average new car loan term length in September for borrowers with prime credit ratings was roughly 70.5 months, which is consistent with pre-pandemic levels.
It may be beneficial for buyers to consider opting for these longer loans. For instance, the monthly payment for 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 approximately $650. This payment is over $100 cheaper per month compared to a 70-month loan and more than $200 cheaper than a 60-month loan.
Tesla has yet to comment on its loan terms.
This move towards extended car loans reflects a broader need in the industry for lower payments. According to automotive-data provider Edmunds, a record-breaking 17.1% of people financing a new vehicle purchase in the second quarter were paying over $1,000 per month on their loan. This percentage has risen from 16.8% in the first quarter and just 4.3% in the second quarter of 2019 before the pandemic hit.
Changing Landscape of Car Financing
According to data from Edmunds, the landscape of car financing has significantly shifted in recent times. In the second quarter, approximately 26% of new car buyers opted to pay in cash or secure third-party financing instead of resorting to leasing or dealer loans. It is important to note that the exact number of buyers relying on third-party providers for cash payments remains unclear. However, this percentage is notably higher than the pre-pandemic figure of less than 20%.
The surge in alternative financing methods can be attributed to several factors, including the rising average transaction price for new vehicles. In June 2022 alone, the average transaction price reached approximately $49,000, a substantial increase from around $37,000 in June 2019, according to Kelly Blue Book data.
As a result of these price hikes and higher interest rates, overall demand for new cars has taken a hit. Currently, car buyers are purchasing new vehicles at a rate of about 15 million units per year, whereas the figure stood closer to 17 million units per year prior to the Covid-19 pandemic.
While Tesla has been known for revolutionizing the auto industry with its mass-market electric vehicles (EVs) and innovative policies, the company recently made headlines once again. In 2023, Tesla implemented significant price reductions of up to 25% on select models. Moreover, the company made a groundbreaking decision by opening up its supercharging network to non-Tesla drivers. This move was initiated through an agreement made with Ford Motor (F) in May.
Now, Tesla is exploring the possibility of popularizing longer loan terms, such as 84-month loans, in an effort to further expand its consumer base and enhance affordability for potential buyers.
Considering these developments, it comes as no surprise that Tesla’s stock performance has been remarkable. Year-to-date, the company’s shares have soared by approximately 118%, surpassing the growth of the broader market indices. Comparatively, the S&P 500 and Nasdaq Composite have recorded gains of around 19% and 36% respectively.
As time progresses, the impact of Tesla’s new loan term adoption on its stock performance will become clearer. On Tuesday, Tesla’s stock remained flat, while it witnessed a more than 3% increase in share value on Monday.
It will be fascinating to observe how the changing landscape of car financing ultimately shapes the future trajectory of Tesla and the wider automotive industry.
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