Has Tesla made electric cars affordable? Not exactly.

April 3, 2013

On Tuesday, Tesla Motors unveiled what it called a "revolutionary new finance product" that, the company said, would allow people to get a mid-range Model S electric car for less than $500 per month.


(Cars.com)

So does that mean Tesla has found a way to make its pricey electric cars affordable? Well, not exactly. A closer look at the fine print suggests that mid-range Model S will more realistically cost around $1,000 per month — not nearly as cheap. Still, the financing scheme is interesting and worth exploring.

Here's how the basic arrangement would work: US Bank and Wells Fargo have agreed to provide financing for the purchase of a Model S. The 10 percent downpayment would largely be covered by federal and state tax credits, which can range from $7,500 to $15,000. The driver could then essentially lease the car, with an option of selling it back to Tesla after 36 months for cash or an equivalent trade-in at a fixed value.

The trick here is that people would be able to "lease" the Tesla Model S while still taking advantage of the federal tax credit to purchase electric cars. That could prove attractive to some drivers, given that a mid-range Model S sells for around $72,400. And, Tesla argues, $500 per month for an electric car isn't so bad, as many families now pay $300 per month for gasoline.

But that $500 per month figure is attracting some heavy scrutiny.

Tesla is estimating what it calls the "true cost of ownership" for an electric car. The actual monthly payment for a Model S will be around $1,200 per month. But the company then estimates that gasoline will be around $5 per gallon and a typical gas-powered alternative isn't all that efficient. So you're saving money there. Then the company assumes that you can deduct the cost of your car for a business. Then the company estimates that you'll save valuable time by driving in a carpool lane — an option for many electric car drivers — and by not having to refuel for gas.

So that brings us to an "effective monthly cost" of, say, $446 per month:

But most of those assumptions are rather tentative. Many people, after all, won't be able to deduct the cost of their car as a business expense. Gasoline now averages around $4 per gallon nationally, not $5. And you can now buy many gasoline-powered sedans that get closer to 30 miles per gallon, not 19 miles per gallon.

Once you tweak those assumptions and make them more realistic, the Model S costs upward of $1,000 per month — or perhaps a bit less if you're in a state with even larger tax credits for electric vehicles, like California or Colorado or Illinois. (You can play around with the calculator here.)

Now, that's not a knock on the broader idea. One way that electric cars could become more popular is if novel financing schemes become more commonplace. Other companies may decide to look more closely at Tesla's idea. But it's always worth reading the fine print.

Related: Expensive batteries are holding back electric cars. Can that change?

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Ezra Klein | April 3, 2013