This product kind of sucks for the consumer, but it's great for Tesla--and it's is the best that Tesla can do due to their shortage of cash and the risky nature of electrics.
The main advantage of a traditional lease is an extremely low monthly payment: the lessee only pays for the depreciation on the car plus interest on the entire purchase price.
Tesla's product does not offer this, because it's simply a five year loan. Rather than for paying for 40% of the car over three years, you pay 100% over five, so the monthly payment will be roughly 50% more than with a real lease.
Why can't Tesla offer a real lease? Because no bank wants the risk on fundamentally new type of car. Normal leases are financed by banks with the car as collateral at the end of three years; this allows the bank to take the risk of much lower principal repayments over the first 36 months. Usually the car's residual is struck low enough to make this a good deal for the bank. However, banks balked at taking the Tesla Model S as collateral, because there's extreme uncertainty about how valuable these cars will be in three years--for example, if there's a breakthrough in battery technology, or if the batteries themselves don't last very long, or the car proves unreliable for other reasons, the final collateral could be worth much less than estimated.
Ideally Tesla would sell the cars to themselves, claim the $7500 tax credit themselves, and pass the savings onto the lessees via lower lease rates, essentially acting as their own bank (many car companies do this, like Nissan with their LEAF and Ford with the Focus Electric). However, Tesla doesn't have the cash or assets to do that. They need to put all of their cash into operations and can't loan it out, and they don't have enough profit for them to take advantage of the tax credit.
So who takes the risk? The customers. They must make 1.5x higher monthly payments even if they plan to sell the car back, and they're taking a risk that Tesla (or Elon) will be around in three years to honor the buyback price. Furthermore, customers cannot sell the car or the guarantee is lost; it's not transferable to a new owner. Tesla is gambling that they'll have the cash to honor the buyback prices even if the car turns out to have massively depreciated. If the car depreciates massively, Tesla may not be around anyway, so it's a good risk for the company. Likely the residual value is struck low enough (~45%) that they can probably resell the cars without a loss in the expected case, even though that number is still too risky for banks to go for.
Kudos to Elon for personally guaranteeing the resale value; that takes some cojones.
Last time I check, no banks did leases. Only the captive finance companies do leases. e.g. Ford Credit / Toyota Credit / GMAC / etc.
This type of financing has been done many times before, but for a different reason. New York and New Jersey have vicarious liability laws which means if the car damages your property, you can sue the owner of the vehicle. In a lease, the credit company has title of the vehicle, thus for a period, no leases were done in certain states, and they just did this same "guaranteed resale/baloon payment" loan.
Are you sure the banks balked at taking Tesla's as collateral? It seems a lot more likely that Tesla simply wouldn't be eligible for the tax credit. I have not read anywhere that banks are not giving out car loans to finance a Tesla because they are worried about having it as collateral. Occams razor says to me it is simply a tax play.
Even if Tesla couldn't take advantage of the tax credit, they can find a bank who could. Leases are riskier than loans for banks for a few reasons:
- The bank has to place a bet on the value of the car 36 months from now--a huge risk. With a loan, they only have to bet on the credit-worthiness of the borrower, and they can ask for additional collateral, if they wish.
- In case of a lease default, there is no equity in the car, because lessors, by definition, only pay for depreciation. On a loan default, there is usually at least some equity in the car.
- Usually the down-payment is less for a lease than for a loan (Tesla's program requires 10% down, almost unheard of for a lease).
All of these factors taken together mean that the bank is much less likely to take a bath on a loan than a lease.
True, and this counts for something. That said, Elon is not putting his money in escrow, and a large portion of his wealth is in Tesla, which disappears with Tesla.
The main advantage of a traditional lease is an extremely low monthly payment: the lessee only pays for the depreciation on the car plus interest on the entire purchase price.
Tesla's product does not offer this, because it's simply a five year loan. Rather than for paying for 40% of the car over three years, you pay 100% over five, so the monthly payment will be roughly 50% more than with a real lease.
Why can't Tesla offer a real lease? Because no bank wants the risk on fundamentally new type of car. Normal leases are financed by banks with the car as collateral at the end of three years; this allows the bank to take the risk of much lower principal repayments over the first 36 months. Usually the car's residual is struck low enough to make this a good deal for the bank. However, banks balked at taking the Tesla Model S as collateral, because there's extreme uncertainty about how valuable these cars will be in three years--for example, if there's a breakthrough in battery technology, or if the batteries themselves don't last very long, or the car proves unreliable for other reasons, the final collateral could be worth much less than estimated.
Ideally Tesla would sell the cars to themselves, claim the $7500 tax credit themselves, and pass the savings onto the lessees via lower lease rates, essentially acting as their own bank (many car companies do this, like Nissan with their LEAF and Ford with the Focus Electric). However, Tesla doesn't have the cash or assets to do that. They need to put all of their cash into operations and can't loan it out, and they don't have enough profit for them to take advantage of the tax credit.
So who takes the risk? The customers. They must make 1.5x higher monthly payments even if they plan to sell the car back, and they're taking a risk that Tesla (or Elon) will be around in three years to honor the buyback price. Furthermore, customers cannot sell the car or the guarantee is lost; it's not transferable to a new owner. Tesla is gambling that they'll have the cash to honor the buyback prices even if the car turns out to have massively depreciated. If the car depreciates massively, Tesla may not be around anyway, so it's a good risk for the company. Likely the residual value is struck low enough (~45%) that they can probably resell the cars without a loss in the expected case, even though that number is still too risky for banks to go for.
Kudos to Elon for personally guaranteeing the resale value; that takes some cojones.