Tesla lowers financing rates, electric vehicle purchase costs a new low

Tesla (TSLA.O) Adjusts Financing Rates for Some U.S. Models, Making Its Cars More Affordable as Promotional Discounts Decrease. This is Good News for Both Buyers and Investors.

Tesla cars cost less

The electric vehicle manufacturer recently raised the promotional financing rate for its Model 3 from 1.99% to 2.99% for a 72-month loan. However, loans with terms shorter than 60 months still qualify for the 1.99% rate.

On the other hand, the base financing rate for most loan terms on the Model 3 and Model Y has dropped by about 0.4 percentage points, bringing it down to 5.59%.

The decrease in financing rates is partly due to a reduction in benchmark interest rates. Currently, the five-year U.S. Treasury yield stands at about 3.7%, down roughly 0.2 percentage points since the beginning of the year, and lower than the 4.7% seen in the spring.

The 0.4 percentage point reduction in most loan terms will only impact monthly payments by a few dollars. However, the increase in the promotional rate to 2.99% could raise monthly payment costs by around $20.

Growing competition in electric vehicles

These changes may seem minor, but they signal a small step toward normalization in the electric vehicle market. Over the past few years, the industry has faced growing competition, which has put downward pressure on new car prices, while higher interest rates have made financing more expensive.

This creates a double hit. According to Kelley Blue Book, the average price of an electric vehicle in the U.S. was about $56,000 in July 2023, compared to around $66,000 in July 2022. There are now more affordable models on the market, but this $10,000 drop reflects the pricing pressures within the industry.

Price pressures have also led to a decline in profit margins. Tesla's operating profit margin in Q2 2023 was around 6%, down from nearly 15% in Q2 2022.

While the situation hasn't fully improved, it is gradually getting better. Kelley Blue Book data shows that, on average, electric vehicle buyers received incentives amounting to about 12% of the purchase price in July 2023, a notably high percentage, compared to around 2.4% for all vehicles.

Overall, these figures reflect a situation where demand growth is slowing amid intensified competition.

Electric vehicle sales grew

In 2023, U.S. electric vehicle sales grew by 46% compared to 2022. However, in the first half of 2024, the growth rate slowed to around 7%. As buyers have more options, Tesla's U.S. sales in the first half of 2024 dropped by about 10%. There are now more than 20 models with sales exceeding 5,000 units in the first half of 2024, compared to 20 models reaching this milestone during the same period last year.

As of last Friday’s close, Tesla’s stock had dropped by about 14% this year. The slowdown in sales growth has impacted investor sentiment. However, Wall Street expects sales to pick up in the second half of the year.

Analysts project Tesla’s sales in Q3 and Q4 of 2024 to reach approximately 950,000 units, higher than the 831,000 units in the first half of 2024 and the 920,000 units in the second half of 2023. Lower interest rates will help Tesla achieve these targets.

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