Falling prices of used electric vehicles have triggered a ‘car leasing crisis’

The dramatic depreciation of electric vehicles has created a “car leasing crisis” that threatens to drive up monthly costs for customers and force them to use older battery models with shorter range, experts warn.

A “fundamental mismatch between market forces for new and used electric vehicles” is said to be at the heart of the problem, as massive demand for new battery-powered car rentals does not match an equally strong appetite for the models. second-hand electrics.

Leasing companies are said to lose thousands of euros every time they release an off-contract electric vehicle onto the second-hand market due to falling residual values ​​of electric cars resulting from a lack of appetite of the public.

To mitigate losses, rental companies are extending contracts and encouraging the re-leasing of used electric vehicles.

For motorists using popular tax-advantaged salary sacrifice programs, the value of the vehicle “benefit” is diminished, as they may be forced to drive older vehicles instead of upgrading to newer electric vehicles with latest technologies, capable of traveling longer distances on a single charge. .

For automakers, contract extensions and re-leasing of electric cars will become another obstacle to achieving the government’s aggressive EV sales targets set out in the zero-emission vehicle (ZEV) mandate, as less new models will be purchased by this sector.

Experts say there is “no end in sight to the electric vehicle residual value crisis” which is forcing leasing companies to “look for ways to best defer their exposure to the second-hand market”.

Auto Data Solutions (ADS), an automotive consulting firm, says “several factors converged” to create the crisis, all linked to low demand for used electric vehicles.

According to the report, the prices of used electric cars – despite depreciation of around 50 percent after just one year – remain too high for the majority of buyers.

Auto Trader’s November Retail Price Index shows the average price of a used electric vehicle was £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 vehicles can become obsolete. as new models come onto the market.

There are also major concerns about the predicted future values ​​of electric vehicles, which are “below current forecasts.”

Some electric vehicles, which were initially expected to retain more than 40 percent of their list price after three years, are achieving sales values ​​in the 20 percent range, he suggests.

On a car with a new list price of £40,000, that represents an unexpected loss of more than £7,000. The problem has already cost leasing companies “hundreds of millions of pounds”, the report said.

“Heavy discounts on new electric vehicles drive down the value of used electric vehicles even further,” he adds, while also highlighting the cost of living crisis and consumer uncertainty.exacerbating the situation.”

He says this “leaves the industry to explore ways to generate as much revenue as possible from existing assets by extending leases or offering used electric vehicle leasing as a service.”

How will this impact drivers and car manufacturers?

Weak demand for used electric vehicles could leave customers facing difficulties securing new electric car leases, as companies scramble to re-lease existing models.

Providers are also likely to increase monthly rates for customers to cover shortfalls and avoid future losses when disposing of off-lease vehicles.

Manufacturers will also be affected by any reduction in demand for new products due to lease extensions.

Historically, automakers have used the daily rental sector to get rid of excess vehicles during periods of low demand, but electric vehicles are widely seen as unsuitable for this role.

“This is not anti-EV sentiment and it is clear that the leasing industry fully supports the transition to zero-carbon driving,” says Amanda Morgan, commercial director and head of leasing at ADS.

She added that the “pace of electric vehicle success” for rental companies, due to the popularity of salary sacrifice and lease deals in general, has created this “imbalance between the demands of the new and used car markets.”

As such, she affirms that a certain number of companies are already re-leasing ex-contract electric vehicles.

Amanda warns: “We are seeing recent analysis from the fleet and finance sectors that indicates there is no end in sight to the EV residual value crisis and that companies are studying the ways to best postpone their exposure to the second-hand market.

“This means extending existing contracts wherever possible, to maintain revenue, and also re-leasing ex-contract vehicles rather than returning them to the market.”

Higher-than-expected depreciation of electric vehicles is also hurting finance providers, who are already facing billions of pounds in compensation linked to the sector’s mis-selling scandal.

Around eight in ten new cars acquired by retail customers are through financing rather than direct cash purchases. And PCP – personal contract purchases – is by far the most common form of financing.

Monthly PCP costs – usually over a three-year period – are determined by the expected value of the car at the end of the contract.

A deposit amount paid at the start of the contract and the estimated residual value are subtracted from the price of the vehicle to calculate the remaining cost which is divided into monthly payments.

This means that customers will pay the depreciation value over the contract period.

Once the contract comes to an end, they can choose to keep the electric car by paying the previously agreed residual value – this is called “lump sum payment”.

However, as the value of electric vehicles falls faster than expected, it will almost always be higher than the existing market value of the car, which is why most finance users decide to return the car and start a new one. contract on another vehicle.

As such, lenders are left with large volumes of used electric vehicles at a loss.

When these electric vehicles are then launched on an already saturated second-hand market, at a time when demand is low, this helps to anchor values.