Why Tesla is Now Offering 7-Year Financing on U.S. Auto Loans

Why Tesla is Now Offering 7-Year Financing on U.S. Auto Loans

Tesla has announced a new 84-month auto loan option for its customers in the U.S., giving buyers up to seven years of financing for new car purchases. The shift, which adds an additional year to Tesla’s previously available financing options, has a very specific reason for being added, according to CEO Elon Musk.

Above: A Tesla Model 3 (Image: Casey Murphy / EVANNEX).

Last week, Tesla added the 84-month financing option to its auto loan repertoire, just after Musk had said the company would “have to do something” about rising interest rates, as Automotive News and Yahoo Finance report. In addition to the 84-month financing option in the U.S. Tesla has also added the option for a 96-month loan in Canada, largely due to rising interest rates according to Musk.

“When interest rates rise dramatically, we actually have to reduce the price of the car, because the interest payments increase the price of the car,” Musk said during last week’s quarterly earnings call. “So we have to do something about that.”

Longer loans tend to mean paying more in interest in the long run, despite them also lowering monthly payments for buyers in comparison with shorter loans. The news also comes after Musk has criticized rising interest rates and the Federal Reserve in the past, even saying last November that the bank’s rate increases were “massively amplifying the probability of a severe recession.”

Other automakers also offer 84-month loans and have even gained popularity in recent years, though data from Experian shows that the trend has slowed down this year. The outlet says that around 34 percent of new vehicle loans in Q1 were for more than six years, dropping from about 38 percent last year.

In the second quarter of this year, Tesla delivered a record 466,140 units, though some also note that the company has outproduced its deliveries for the past five quarters. Following the Q2 earnings call and Musk’s statements that the automaker may have to lower the price of its cars, Tesla shares have trended down, currently trading at $263.43 for a 0.70-percent drop during Tuesday trading hours.

Thus far, Musk’s predictions regarding deflation haven’t taken place, though he has been outspoken about how rising interest rates affect the auto industry over the last couple of years. At the moment, Tesla’s 7-year loans for the Model 3 come with a 6.39-percent interest rate, and are up from the company’s previous offering of up to 72-month financing.

“If interest rates continue to rise, that reduces the affordability of cars. And for a lot of people, they're really kind of just barely breaking even every month,” Musk added. “In fact, if you look at the rise in credit card debt, they are, in fact, not breaking even every month. Like, credit card debt is freaking scary.”


Sources: Automotive News / Yahoo Finance