How Is Tesla Offering 0% Financing?

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After writing the other day about Tesla’s profit per vehicle dropping considerably in the last few years, a discussion ensued of course about the matter and about whether Tesla’s profit per vehicle is that bad or not, and on the uptrend or downtrend.

One thing that came to mind for me was Tesla’s 0% financing. This is a big thing that I think goes under the radar.

“The U.S. Federal Reserve benchmark federal funds rate remains targeted at 3.50% to 3.75%. Associated key borrowing rates include a prime rate of 6.75% and average national mortgage rates hovering at 6.59% for a 30-year fixed-rate loan,” Google tells me.

No company is offering a 0% interest rate unless they are subsidizing it. I was at a KIA dealer recently looking into the EV6, and they provided an initial financing sheet showing 7% interest, indicating that could be lower with a very good credit rating. That’s a massive difference from 0%.

• On a $40,000 car loan across 5 years at 7% interest, you’re paying about $7,523 in interest.
• On a $35,000 car loan across 5 years at 7% interest, you’re paying about $6,583 in interest.
• On a $35,000 car loan across 5 years at 6% interest, you’re paying about $5,999 in interest.
• On a $35,000 car loan across 6 years at 6% interest, you’re paying about $6,879 in interest.

Whatever the details are for an individual buying a Tesla with 0% interest, the company is effectively providing a subsidy of several thousand dollars.

One might argue that Tesla can afford to do that because it has high profit margin on each vehicle, but it really doesn’t any more. Tesla has cut costs, provided bonuses, and done multiple things to try to entice buyers. It has been working hard to stimulate more sales, yet it is still far behind where it was years ago.

I tried to get more info on how exactly Tesla arranges things to be able to provide this 0% financing. Unfortunately, Google hasn’t been particularly helpful. In one of its AI responses, I noticed that it actually referenced an article of mine from 2021 that had nothing to do with this question. Anyway, though, this is the general summary people need to understand: “Tesla offers 0% financing (often paired with 0.99% alternatives) as a strategic promotional tool to boost sales and clear inventory. By subsidizing the loan, Tesla absorbs the interest cost, which essentially acts as a major price discount without officially lowering the vehicle’s Manufacturer’s Suggested Retail Price (MSRP).”

In the past, it was claimed that Tesla required 15–20% down to get 0% financing, or that the person had to buy Full Self Driving (FSD), but the Tesla website right now just shows a $3,300-down requirement on a $39,990 Tesla Model Y, and you can no longer buy FSD at all. The default length of the loan term shows 72 months, but you can make it shorter or can even make it 84 months. Using those assumptions, on a $36,690 car loan at 6% interest over 6 years, you would pay $7,222 in total interest. That’s a big subsidy.

Could Tesla just sell the car for $32,770 instead? Probably not. That would probably mean a strait loss on the car. However, Tesla has a lot of cash on hand, so maybe it is just using that and some magical financial accounting to subsidy the no-interest loans. One has to wonder about the details of how this works. Perhaps there’s a finance expert in the house who wants to explain it further.

Overall, though, this is a bit like an auto dealer offering to slash $7,000 off the list price of a vehicle. For a buyer, that may be a super enticing deal. However, looking broadly at a company offering this around the US, one has to see it as a bit of a desperate attempt to stimulate sales. No?