Should you take out an 84-month Tesla loan?
Last week, Tesla announced that the auto brand will offer an 84-month financing option to its drivers. Tesla CEO Elon Musk said during an earnings call that this comes because of very high interest rates.
"When interest rates go up so high, we actually have to lower the value of the car because the interest payments increase the value of the car," Musk explained. "We have to do something about it."
Moreover, a new Tesla is not a cheap investment. Base price for the Model S is $88,490, while the all-wheel drive Y is $47,740, and that's after the company's most recent discounts. Tesla's price has also lowered the average price of electric vehicles, since Tesla makes up such a large share of the new market. June saw an average price of $53,438 for a new electric vehicle, according to Kelly Blue Book (KBB).
Now, buyers who choose Telsa financing can extend their loans for up to seven years while lowering their monthly payments. But a long-term loan is not the right move for every driver. In addition to being stuck with the car for nearly a decade, long terms can lead to a loan underwater as the interest builds up and the car's value drops.
A longer loan means smaller monthly payments
In the case of Tesla, long-term loans of up to seven years are nothing new for auto dealers and lenders. Car loans often range between 24 and 60 months, but as interest rates rise, more borrowers are choosing 72, 84 or even 96 month loans. The longer loans are intended to allow for cheaper monthly payments to drivers.
The term of your loan determines how long it will take you to pay off the loan before the car is completely yours. So when you sign the longest loan available, you'll spend the lowest amount per month. But paying less each month isn't always the best idea.
Long-term debt risks
If your focus is on the small monthly payment and you plan to keep your Tesla for years to come, then an 84-month loan could be a good idea. But it is also important to assess the risks of this type of loan.
Would love to be more upside down. Being in reverse of your loan means that you owe more than the value of the car. The longer you own the car, the lower its value as the interest increases. So if you've been paying off your car over a long period of time, you're likely to owe more than the car is worth. And you'll be sitting on a less expensive car when it's finally yours.
Pay high interest. A long-term loan will cost you more money over the life of the loan than a loan at the same rate for a shorter period of time, since the interest accrues over the term.
What will be my monthly payment?
If the option to extend the term of the loan gets you on the Tesla Train, consider what monthly costs you'll actually incur and whether a direct lender could offer a better experience.
After rummaging through the Tesla website, I found a Pearl 3 model available in my area for $38,470.
Tesla's website estimates that with internal financing, for 84 months and a $4,500 down payment, I'd spend $532 a month. Although my credit was not included in the predicted cost, the expected annual interest rate of 6.84 percent is similar to the industry average for prime drivers -- 6.40 percent for new cars, according to Veterans statistics. The monthly cost also falls within drivers' average cost of a new car, in each credit score range, in the first quarter of 2023.
Here's how those costs compare to a 60-month loan if you kept the same down payment and interest rate.
Loan Term Down Payment Interest rate Monthly payment Total interest paid
84 months $4,500 6.84% $517.55 $9,004.43
60 months $4,500 6.84% $679.95 $6,326.89
In-house financing is not your only option. For example, Tenet, an auto lender that caters specifically to electric vehicle drivers, offers borrowers the option to extend the loan term up to 84 months. Tenet rates range from 5.89 percent to 16.35 percent with excellent credit. Tesla's full range of financing rates is not shared on its website.
But that doesn't mean the lender offers a better experience or product. When choosing between two loans, especially long-term loans, consider fees, customer experience, and potential perks and benefits. Tenet, for example, offers a deferred payment option that allows drivers to secure a lower monthly payment.
Next Steps
According to KBB, Americans bought 48 percent more electric cars in the second quarter of 2023 than a year ago. Tesla was the market leader in this segment with more than 175,000 vehicles sold. If you want to get behind the wheel of a greener car, Tesla or otherwise, consider how a long-term loan might not save you money and shop around for other loan options to compare in-house financing.
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