The Road to EV Leases

Even if price cuts this year have brought some electric-vehicle models within reach of more consumers, it can still be a better deal to lease one instead.

Leasing, the article says, lets consumers qualify for a full $7,500 federal tax credit without meeting restrictive federal requirements on where an electric car was made, how much it costs or how much a lessee makes.

Leasing also addresses consumer concerns over high prices. The Consumer Reports American Experiences Survey of more than 2,000 Americans in May found that 30% of respondents would consider buying or leasing an EV, but 55% saw the purchase prices of the vehicles as an impediment. With a lease, consumers make a monthly payment to a leasing company to drive a new car for a set number of months—usually 18 to 36—and for a set number of miles. The payment is essentially the amount the car is expected to depreciate during the lease period.

Monthly lease payments are frequently less than the amount it would cost to finance a new vehicle for a similar period, despite having to make a down payment. At the end of the lease, consumers can return the car to the leasing company. 

All of those points make leasing an attractive option for consumers interested in an EV purchase, according to Brian Moody, executive editor of Autotrader and Kelley Blue Book.

“While electric car prices are down overall, not all electric cars qualify for taxpayer-funded federal tax credit,” Moody says. “However, leasing is a way to qualify for the tax incentive, even if the electric car you want doesn’t meet the domestic-production requirements. Leasing is one way to take advantage of that tax credit. Plus, it’s a shorter commitment to a new and emerging technology.”

The advantages of leasing are clear to consumers, but is leasing an advantage for dealers? And how can dealers leverage the trend to their advantage?

Auto Dealer Today spoke with Alex Liegl, co-founder and CEO of Tenet, a platform whose stated mission is to accelerate mainstream adoption of electrification technologies by making EVs more accessible, starting with EV loans for consumers and businesses.

Leasing vs. Purchase

Leasing a vehicle can make an EV’s higher price point easier for the consumer to swallow. However, it can also lessen the long-term financial benefits of the vehicles, according to Liegl.

“While both leasing and buying options for EVs are becoming far more prevalent, leasing makes it harder to take advantage of the long-term financial benefits that EVs have to offer.”

He says today’s EVs better retain their value over time compared to just a few years ago, when pro-EV digital platform Carnex reported that, “On average, [gasoline-powered] vehicles retain 60% of their value after three years of use, yet EVs depreciate faster and only retain 48.9% of their value after three years.” 

Consumers who seek a lease for lower payments may also discover it’s possible to get lower loan payments than they expect when financing and purchasing an EV. Leasing isn’t always the best option, Liegl says.

“When factored into loan calculations—things like battery life, state and federal tax incentives, and lower maintenance costs—it’s possible for car owners to shave up to $200 a month off their payments and access terms that are cost-competitive with loans for gas cars,” he says. “But with leasing, it’s the responsibility of the dealer to pass along the financial incentives or lifetime value.” 

Other Considerations

Cost and availability are top considerations for consumers traveling the leasing route.

“While more affordable EV options are continuing to reach the market, potential customers must consider the upfront cost associated with buying an EV,” Liegl says.

On the flip side, “While leasing allows the buyer to pay less money upfront, it’s more difficult to reap the long-term financial benefits, as EVs offer a lower total cost of ownership throughout their lifetime.

“This is because once the car is paid off, maintenance and charging costs are minimal. Leasing may have lower monthly payments – though some financing plans may be equal or lower. However, leasing payments over the same period of time as a finance payment will be higher, and the customer will not have a paid/owned asset at the end of the lease term.”

Who gets the tax credit also shifts between buying and leasing. Liegl says, “Buyers will have full access to EV tax credits when purchasing a vehicle, but this benefit will be shared with dealerships when leasing. And the availability of specific makes and models will depend on if a car is being purchased or leased.”

Why Consumers Want EV Leases

Still, dealers can expect consumers to prefer leasing to an outright purchase for several reasons. Those uncertain about EV resale values and the life of the vehicle may prefer to lease, he says.

“With leasing a vehicle in general, there is less of a responsibility for long-term maintenance and upkeep,” Liegl says. “At the end of a lease term, customers also can upgrade to a new vehicle model and do not have to go through the hassle of selling their car.”

A recent Experian report found that 85% of EV buyers also own a gas-powered model, likely due to limited charging infrastructure in many areas.

“EVs can be viewed as an emerging technology for many mainstream consumers,” Liegl says.

Get Consumers Into the Right Option

Consumers may come into the dealership unsure of whether they want to lease or buy. Here, Liegel says it’s vital that dealers are prepared to educate consumers on the benefits of buying versus leasing to match the financial considerations and use case of the vehicle to each customer.

 “Dealerships should present customers with a full picture of their options to buy, finance, and/or lease a vehicle and make recommendations based on their needs, budget, and vehicle preferences.”

Tenet doesn’t offer EV leasing options. However, Liegl says dealerships have a duty to educate lease-minded customers about leasing before they offer one.

“At the end of the lease term, the customer does not own the vehicle. Hence, they may not be concerned or aware of the lower depreciation rate, recurring software updates (unique to EVs) and incentive programs available to equal or lower the cost of financing compared to a lease.”

Liegl recommends answering the following questions for customers interested in an EV purchase:

• What are the short-term costs compared to the long-term costs of leasing?
• How can federal Inflation Reduction Act tax credits and state rebate programs affect the total purchase price and recurring costs when considering financing or leasing an EV?
• How do they finance an electric vehicle? What are the best financing options and platforms?
• Which vehicles qualify for incentive programs, and which do not? Why do certain models qualify while others do not?

Double Down on Sales Training

In addition, dealership personnel may need training to overcome consumer objections to electric vehicles and to put customers into the right option for them.

McKinsey & Company research found that 90% of potential customers visit showrooms for test drives and other processes related to the purchase of cars in general, wanting to touch and experience the product. The same holds true for EVs. Salespeople must be prepared to answer questions about EVs, charging systems, tax credits and more.

Liegl says it’s important to stress that customers can take advantage of tax rebates with a lease if leasing is preferred. “Many automotive dealerships still offer $7,500 in incentives off the price when leasing an EV. However, this can often be complicated and more difficult to access than when buying an EV that qualifies for federal tax credits.”

The Right Lender Partnerships

Leasing EVs requires dealerships to work with lenders that offer loans and leasing and have agreements in place for leasing fees, rates, etc., according to Liegl. Not all lenders do.

Risk enters the picture when leasing arrangements aren’t worked out in advance.

“The risk to the dealership depends on their arrangement with the leasing firms they work with, but presumably, it's residual value risk, etc., since in this case, the leaser (the dealership) owns the EV, not the lessee (the customer). This is different from financing a vehicle with loans, where the borrower owns the car and assumes the residual value risk.”

However, even with those risks, l many dealers still see leasing as a viable option, though Liegl says he prefers financing or outright EV purchases instead.

“Dealerships who lease EVs are able to take advantage of the low depreciation rates of the vehicles, maintaining value following the lease term,” he says. “Dealers can also take advantage of IRA tax credits.”

Ronnie Wendt is an editor at Auto Dealer Today.

Originally posted on Auto Dealer Today