The dramatic depreciation of electric vehicles has led to a ‘car leasing crisis’ that threatens to drive up monthly costs for customers and force them to use older battery models with shorter ranges, experts warn.
It is said that a ‘fundamental mismatch between market forces for new and used electric cars’ is at the heart of the problem, as the huge demand for new battery lease cars is not being met with equally strong demand for second-hand electric models.
Leasing companies are said to lose thousands of euros every time they bring an out-of-contract electric car onto the second-hand market, due to the falling residual value of electric cars due to a lack of public interest.
To limit losses, leasing companies are instead extending their contracts and encouraging the re-leasing of used electric vehicles.
For motorists taking advantage of popular salary sacrifice tax incentive schemes, the value of the vehicle ‘perk’ is reduced as they could be forced to drive older vehicles rather than upgrade to newer electric vehicles with the latest technology that can cover longer distances on a single car. attack.
For automakers, contract renewals and re-leasing of EVs will become a new hurdle to achieving government-mandated aggressive EV sales targets set out in the Zero Emission Vehicle Mandate (ZEV), as fewer new models will enter the sector. are picked up.
Experts say there is ‘no end in sight to the residual value crisis of electric cars’, which is forcing leasing companies to ‘explore ways to best defer exposure to the second-hand market’.
The relatively low demand for used electric vehicles compared to the large number of new EV leases has created a crisis for providers
Auto Data Solutions (ADS) – a specialist automotive consultancy – says ‘several factors have come together’ to create the crisis, all linked to low demand for used electric cars.
It says prices of second-hand electric cars – despite a depreciation of around 50 percent after just one year – are still too high for the majority of buyers.
Auto Trader’s November Price Index shows that the average second-hand electric car cost £26,390, almost double the price of a petrol car (£14,710).
ADS says most used car buyers still prefer cheaper petrol and diesel models, especially as concerns remain about the infancy of battery technology and how quickly electric cars could become obsolete as newer models come to market .
And there are also major concerns about the predicted future values of electric vehicles, which are ‘lagging current forecasts’.
Some electric vehicles, originally expected to retain more than 40 percent of their list price after three years, are achieving resale values around 20 percent, the report suggested.
For a car with a new list price of €40,000, this is an unexpected loss of more than €7,000. The problem has already cost leasing companies ‘hundreds of millions of pounds’, the report said.
“Steep discounts on new electric cars are further driving down the value of used electric cars,” it added, while also pointing to the cost of living crisis and consumer uncertainty.worsen the situation’.
It says this ‘gives the industry the opportunity to explore ways to generate as much revenue as possible from existing assets through lease extensions or offering used EV leasing as a service’.
Leasing companies are said to lose thousands of euros every time they push an out-of-contract electric car onto the second-hand market
What impact will this have on drivers and car manufacturers?
The result of low demand for used EVs could mean that customers face difficulty securing lease deals for new EVs as companies push to re-lease existing models.
Providers are also likely to increase monthly rates for customers to cover shortfalls and prevent future losses when disposing of former leased vehicles.
Manufacturers will also be affected by any drop in demand for new products due to lease extensions.
Historically, automakers have used the daily rental sector to offload surplus vehicles during periods of weaker demand, but electric vehicles are widely seen as unsuitable for that role.
“This is not about anti-EV sentiment and it is clear that the leasing industry is fully behind the transition to carbon-free driving,” said Amanda Morgan, commercial director and leasing sector leader at ADS.
She added that the “pace of EV success” for leasing companies is due to the popularity of salary sacrifices and leasing deals in general created this ‘imbalance between the demands of the new and used car market’.
That’s why she says a number of companies are already re-leasing ex-contract EVs.
Amanda warns: ‘We see recent analysis across the fleet and financial sectors showing that there is no end in sight to the EV residual value crisis, and companies are exploring ways to best leverage exposure to the second-hand market set.
‘This means that we need to extend existing contracts where possible to maintain turnover, and also re-lease ex-contract vehicles rather than putting them back on the market.’
Car leasing companies are now starting to offer released used electric cars to customers who may be stuck with models with outdated technology
The higher-than-expected depreciation of electric cars is also a stimulus for financial services firms, which are already facing billions of pounds in compensation payments linked to the sector’s mis-selling scandal.
About eight in ten new cars purchased by private customers are made through financing rather than outright cash purchases. And PCP – personal contract purchasing – is by far the most common form of financing.
The monthly PCP costs – usually over a three-year period – are determined by the predicted value of the car at the end of the contract.
A deposit paid at the start of the contract and the estimated residual value are deducted from the price of the vehicle to calculate the remaining costs, which are spread over monthly instalments.
This means that customers pay the value of the depreciation over the contract period.
When the contract is about to expire, they can choose to keep the electric car by paying the pre-agreed residual value, the so-called balloon payment.
However, because EV values are falling faster than predicted, this will almost always be more than the existing market value of the car. Therefore, most financial users decide to return the car and conclude a new contract for another vehicle.
As such, financial services companies with large quantities of used electric vehicles are left at a loss.
When these electric vehicles are then released into an already saturated second-hand market at a time when demand is low, it helps entrench values.
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