Should you get an 84-month Tesla loan?

Last week, Tesla announced that the vehicle brand would offer an 84-month financing option for its drivers. This comes in large part because of high interest rates, Tesla CEO Elon Musk said during an earnings call.

“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 explained. “We have to do something about that.”

On top of that, a new Tesla is not a cheap investment. The Model S has a base price of $88,490, while the all-wheel-drive Y sits at $47,740, and these are after recent cuts made by the company. Tesla’s price decrease even drove down the average cost of EVs, as Tesla makes up such a large portion of the new market. June saw an average cost of a new EV of $53,438, according to Kelley Blue Book (KBB)

Now, buyers opting for Telsa financing can extend their loans for up to seven years, lowering their monthly payments. But a long-term loan isn’t the right move for every driver. Aside from being stuck with the car for almost a decade, longer terms can lead to becoming underwater on the loan as interest accumulates and the vehicle depreciates.

A longer loan will mean smaller monthly payments

Long-term loans, up to seven years in Tesla’s case, are not new for car dealers and lenders. Auto loans often last between 24 and 60 months, but with higher interest rates, more borrowers are opting for 72, 84 or even 96-month loans. The goal of longer loans is to allow for a cheaper monthly payment for drivers.

Your loan term defines the amount of time that it takes for you to pay off your loan before the vehicle becomes fully yours. So when signing off on the longest available loan, you will spend the least amount of money each month. But paying less each month isn’t always the perfect idea.

Long-term loan risks

If a small monthly payment is your focus and you intend to hold onto your Tesla for years to come, an 84-month loan can be a fine idea. But it is also important to weigh the risks of this type of loan.

• More like to become upside down. To be upside-down on your loan is to owe more than the vehicle is worth. The longer you own the car, the more it depreciates as interest stacks up. So if you are paying off your vehicle for an extended period, you’re more likely to owe more than the car is worth. And you will be sitting on a less valuable car when it’s finally yours.
• More interest paid. A longer-term loan will cost you more money over the loan’s lifetime than a loan at the same rate for a shorter term, as interest builds throughout the term.

What will my monthly payment look like?

If the option to extend your loan term has gotten you on the Tesla train, consider what your monthly cost will actually be and if a direct lender could potentially provide a better experience.

After digging around the Tesla site, I found that a Pearl Model 3 was available in my area for $38,470.

Tesla’s site estimated that with in-house financing, an 84-month term and a down payment of $4,500, I would spend $532 per month. While the predicted cost did not account for my credit, the estimated APR of 6.84 percent is close to the industry average for prime drivers — 6.40 percent for new vehicles, according to Experian data. The monthly cost also falls under the average cost drivers spent for a new vehicle, in every credit score band, in 2023’s first quarter.

Here’s how those costs compare to a 60-month loan if I kept the same down payment and interest rate.

In-house financing is not your only option. For example, Tenet, an auto loan lender that caters specifically to EV drivers, also presents borrowers with the option to extend loan terms to 84 months. Tenet’s rates range from 5.89 percent for those with excellent credit up to 16.35 percent. The full range of Tesla financing rates is not shared on its website.

But this does not mean either lender offers a better experience or product. When choosing between two loans, especially longer-term loans, look out for fees, customer experience and potential add-ons and benefits. Tenet, for example, offers a deferred payment option that allows drivers to secure a smaller monthly payment.

Next steps

Americans purchased 48 percent more EVs in the second quarter of 2023 compared to last year, according to KBB. And Tesla was the market leader in the segment, selling more than 175,000 cars. If you want to get behind the wheel of a green vehicle, Tesla or otherwise, consider how a long-term loan might not always save you money and shop for other loan options to compare with in-house financing.