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Tesla Announces Creative New Financing Program
Jeff Cobb April 2, 2013
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Today during a media conference call, Tesla Motors answered the mystery people have wondered about since CEO Elon Musk tweeted last week he would make a “HUGE ANNOUNCEMENT” and “put my money where my mouth is.”
And here it is: Tesla will offer the Model S for purchase in the U.S. via a unique 66-month financing program that has “the best elements of leasing and ownership,” said Musk.
After 36 months, a buyer may turn the car back in and be guaranteed payment for it by Tesla in an amount that’s no less than the residual value of a Mercedes-Benz S class. Musk said he would personally guaranty the car’s buy-back amount with his own funds, if needed.
His net worth is estimated in the billions, and he broached the notion others have suggested that that Tesla could go out of business, or the electric car’s value could plummet, but these are being guaranteed against by the company, and its principle officer.
Presently, the residual value for a Mercedes S-Class is about 43 percent of the selling price, and Musk said Tesla expects the Model S to actually be worth more than that.
The way the program works is, assuming a customer’s credit approval, the arrangement through US Bank and Wells Fargo requires 10 percent down on the purchase price of a Model S.
Using a hypothetical $70,000 Model S, Musk estimated net out-of-pocket costs in the neighborhood of $500 per month. He said depending on the situation, it could be “quite a bit” less than that.
“When considering the savings from using electricity instead of gasoline, depreciation benefits and other factors,” Tesla says in a press release, “the true net out of pocket cost to own a mid-range Model S drops to less than $500 per month.”
Tesla notes also that the 10-percent down payment is “covered or more than covered” by federal and state tax credits ranging from $7,500 to $15,000.
A buyer would have to pay the down payment out-of-pocket as the $7,500 federal tax credit is not a point-of-sale rebate, but the assumption is the buyer could recoup this at tax time. As for state incentives, it all depends on whether a state offers money for EV purchases. Some do, some do not. Buyers in states that do can apply this toward the down payment.
It was also pointed out that New Jersey, Washington state, and Washington, D.C. have no sales tax for electric vehicles and these advantages are not available when leasing.
One main motivation in doing this, said Musk, is he wanted to lower the barrier to entry to make the Model S affordable, and will personally guaranty the customer’s peace of mind.
“I’m essentially making myself fully liable for that,” Musk said and he added that he thinks the program to make the car available to a wider demographic “is the right thing to do.”
Under the program’s terms, after 36 months, the buyer has the right – but not the obligation – to sell back the Model S to Tesla for the same residual value percentage “as the iconic Mercedes S Class.”
Daimler is also a Tesla partner and investor, and Musk emphasized Tesla wants to eliminate any uncertainty among consumers in the prospect of buying a Model S.
The program is limited at this point to U.S. sales and is not to be confused with a lease. It is essentially a financing agreement in which the customer at 36 months can keep on paying for the five-and-a half year term, or not.
If the consumer wants out at 36 months, Musk said the buyer can “put” the car back to Tesla at a guaranteed number, or better.
“We will pay market rate,” Musk said, accounting for his belief that the Model S will be worth more than 43 percent in 36 months.
A buyer also has the right to privately sell or trade the car at any time, and pay off the principle and get out of the deal.
If a buyer wishes to keep the car for the whole term, the buyer need do nothing but keep paying on the car.
Since Tesla is an innovative company with new products pending, and promises more development on its evolving technology, the program is also there as a convenient exit clause to assure buyers they will not be stuck with an undervalued EV.
Musk said he was accounting also for the concerns that exist that Tesla Motors could fail, although indicators are not there that this is likely.
He said most opinion makers who have postulated Tesla could go belly up do so not looking at the fundamentals, but based on conjecture around the fact that no American automotive start up since Chrysler has survived.
Musk said he thinks Tesla has “a bright future,” and anyone who does due diligence and comes and sees the operation first hand goes away more convinced.
By reducing the financial barrier to entry, and wrapping it with assurances, Musk said Tesla expects a broader customer base to find the Model S affordable.
The company already “does not have a demand problem,” he said, referring to Tesla’s long waiting list of Model S customers. But he said he wished to open up the possibility for more people to get the car than has been possible under previous limits of either paying cash or buying with a conventional loan.
The company has a cost estimate calculator on its Web site, Musk said, which should help people figure whether financing the car will work for them. Naturally also, further details are available from Tesla.
Posted in Culture & Market
Tagged as Tesla financing, Tesla lease, Tesla Model S, Tesla US Bank, Tesla Wells Fargo
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