Most consumers rely on auto loans to finance new vehicle purchases. Tesla Inc. has offered an 84-month auto loan after Elon Musk said 'something needs to be done' about the auto affordability crisis, according to Bloomberg.
In general, 84-month loans are less common than 36 - 48 or 72-month auto loans, but with new vehicle borrowing rates at two-decade highs and prices at record-high levels, the solution has been to stretch out the payment for seven years to stoke demand. There's one problem with these loans: the period is much longer, and the interest cost will be much higher.
Financing options for Tesla Model S Plaid
"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 in a July 19 earnings call. "So we have to do something about that," he said.
According to Bankrate, a new car's average 60-month auto loan rate peaked at 7.64%, not seen since December 2001. There are many Americans with +$1,000 payments.
Tesla's chief executive officer has been critical of the Federal Reserve's 16-month aggressive interest rate hiking cycle. Musk tweeted late last year that hiking interest rates were "massively amplifying the probability of a severe recession."
While there is no recession yet, used car prices have slid due to mounting affordability concerns. High borrowing costs have done exactly what the Fed's goal has been, which is to stymie demand. We've covered the latest trends in used car prices in notes titled Used-Car Prices Continue Slide As Signs Of Normalcy Start To Reemerge and Used-Car Prices Tumble Most Since Start Of Pandemic, Record Drop For Month of June.
The move to offer 84-month loans is to stoke demand amid an EV price war with other carmakers.
