Tesla CEO Elon Musk has blamed the Fed and high interest rates for everything from depressing the economy to shrinking the company’s margins. Now it seems the company is doing something about it.
As first reported by the Automotive News, Tesla (TSLA) is now offering 84-month, or seven-year, loan terms for consumers looking to finance new Tesla vehicles. Tesla’s order page for the Model 3 sedan offers 84-month financing at 6.39% interest rates, whereas previously the automaker only offered 72-month loan financing.
Typically auto loans over 60 months are considered long-term auto loans, and while uncommon, extended finance terms have now become more popular. Longer loan term lengths make monthly out-of-pocket expenses cheaper for consumers, though they end up paying much more in interest expenses.
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In the recent past Musk has blamed the Fed’s recent interest rate hikes as threatening to trigger a “severe recession,” and criticized the “latency” of the Fed’s data in the central bank’s approach. According to Musk, as interest rates rose, the only way Tesla could reduce monthly outlays for the consumer was by cutting prices. It also didn’t hurt that an EV price war would bring massive pain to its competitors in the marketplace.
“As interest rates rise, the affordability of anything bought with debt decreases, so effectively increasing the price of the car,” Musk said last week during the company’s earnings call. “So when interest rates rise dramatically, we actually have to reduce the price of the car because the interest payments increased the price of the car. And this is — at least up until recently, it was, I believe, the sharpest interest rate rise in history.”
Tesla offering extended loans via its captive finance company could bring in more consumers who are looking to purchase Tesla EVs but can’t afford the current monthly outlay. Lower monthly finance costs plus the effect of the federal EV tax credits could help Tesla hit its 1.8 million to 2 million yearly target for deliveries. More financing originations are also a good way for the company to increase profits, and the company recently tapped the debt market to raise funds for its lease business.
With the Fed’s upcoming policy and rate decision coming this week, we may hear more from Musk about his thoughts on US central bank policy and its effect on the consumer — and how much Musk can expect from a strained consumer. For Musk, the affordability of Tesla’s cars is paramount in increasing volume, and a tapped-out consumer is bad for business.
“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 said last week. “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.”
Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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