Published on September 29th, 2019 | by Jennifer Sensiba0
Tesla Should Get Into Financing Cars
September 29th, 2019 by Jennifer Sensiba
Here on CleanTechnica, we’ve had a number of stories showing how much cheaper, in total, owning a Tesla can be compared to common gas-powered economy cars. While the purchase price of cars like the Toyota Camry and Honda Accord are a lot lower than a basic Model 3, the costs of ICE (internal combustion engine) maintenance and fuel often end up adding up to more than what the Model 3 would have cost. Despite this, people keep buying the “cheaper” cars.
Yes, there are a variety of reasons a buyer might choose a Camry over a Model 3, and they all aren’t a lack of awareness. The inconvenience of charging on trips, lack of charging in many apartment complexes and condos, and fewer defects from automakers more experienced with mass production are all factors that can lead a rational person to choose something other than the Tesla. It wouldn’t be fair to not mention these.
However, there’s definitely one big obstacle that’s likely keeping many from choosing the Tesla: financing. Even with excellent credit, there are people who could really afford the Tesla but can’t get into one because the bank says NO. [Editor’s note: I was in that boat last year, and then all of a sudden had no problem getting a loan (not sure why) and got financing with a low 3.75% interest rate.]
Why Is This Happening?
When financing a car, there are two big factors considered: your credit score and your debt/income ratio. These are interrelated.
Depending on your credit, banks decide how much debt it’s safe for you to be in every month compared to your income. If your credit is poor, they won’t allow any more debt. If it’s good, and you owe less than the allowable percentage every month, there’s room for you to take on more debt with them, but only if it won’t put you over the limit. In other words, even with good credit, there’s a limit to the car payment they’ll let you get into.
None of this has anything to do with the total cost of ownership (TCO), though. If you buy the largest rolling McMansion SUV you can get your hands on, and it gets 12 MPG, the bank doesn’t care as long as the payments fit within your allowed debt-to-income ratio. The gas to do the driving you intend to do could cost double the car’s payment, and that still never enters the bank’s thought process. This creates situations where banks will allow a very high TCO, regardless of how ruinous that would be to your finances and future ability to make a payment.
Meanwhile, the same buyer might not be able to afford a few hundred more per month on the Tesla, despite the fact that the Tesla doesn’t cost as much to maintain and fuel every month. In other words, the gas vehicle, no matter how inefficient, gets an advantage in the banking world that the Tesla doesn’t get.
What Tesla Can Do Here
Tesla recently started offering insurance, and can do so at lower prices because the company found insurers willing to consider the data Tesla had collected on the safety of Tesla vehicles. They plan to expand this more in the future (for willing drivers) by even allowing individual driving data for greater discounts.
At the end of the day, it was all about getting traditional players in the insurance industry to consider new information that didn’t used to be a factor. They could do the same thing with banks.
Tesla needs to find banks willing to consider the vehicle’s lower TCO and not just the payment when considering loans to buyers. The “Tesla stretch” is real, and it’s something that can actually put borrowers in a better situation. Borrowers in a better situation every month are better at making the payments and avoiding repossession.
If Tesla can’t find banks to consider this, its might have to do what many automakers already do: run its own bank. Ford has Ford Motor Credit. GM has GMAC. Nissan has NMAC. There’s no reason Tesla couldn’t find a way to do the same thing, and maybe even run lower risks with its financing than those financing gas-powered vehicles.
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