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Car shoppers were far more likely to lease electric vehicles this year than buy them, as they took advantage of a $7,500 tax credit available under the Biden administration’s clean energy subsidies.
About 52 per cent of EVs were leased in November, compared to 8 per cent in November 2022, according to data from Edmunds, the online car shopping guide. The lease rate for cars with traditional engines in November was 22 per cent.
Leasing allows car shoppers to apply the full $7,500 tax credit included in the Inflation Reduction Act to an electric vehicle, regardless of whether the car meets benchmarks for parts produced in North America that apply if the vehicle is purchased. The legislative dodge undercuts the law’s intent to bolster North American EV manufacturing while upholding its climate change goals by giving consumers more choices to go electric.
“The percentage of EVs that we’re leasing has gone up dramatically,” said Bill Stephens, general manager of Norm Reeves Hyundai Superstore in California. “If you lease the car, you qualify for the $7,500 tax rebates, and I would say that’s by far the No 1 reason.”
Leasing started as the preferred choice among early adopters of electric vehicles. In November 2020, consumers leased 65 per cent of the electric vehicles sold, more than double the rate for cars with traditional engines. The leaseholders, looking ahead to improvements in battery technology and range, wanted to avoid being saddled with early-stage cars and trucks.
But in 2021 leasing rates began to fall, and they kept falling last year, bottoming out at 7 per cent in September and October. Supply chain shortages tightened the inventory of new cars, and amid the crunch, carmakers stopped subsidising leases. EVs also depreciate faster than gas-powered cars. The result is that leasing became as expensive as buying, so “it didn’t really make sense to lease at that time”, said Edmunds executive director of insights Jessica Caldwell.
But now leasing is “a pretty financially compelling option”, she said, because applying the tax credit makes the monthly payments more affordable.
A report released in August by Energy Innovation, a San Francisco energy and climate policy firm, compared the cost of ownership for EVs versus petrol-powered cars, including lower operating costs, and found that the federal tax credit “makes average monthly lease prices 12 per cent cheaper for leased vehicles, . . . making almost every EV model cheaper to lease than gasoline-powered alternatives in most states”.
The US Treasury Department said when Congress wrote the IRA it categorised leased EVs as “commercial”, because the vehicle title technically belongs to either the dealership or finance company. Commercial electric vehicles do not need to be assembled in North America or have a certain percentage of their parts from there to acquire the full tax credit.
The practice has critics. US Senator Joe Manchin of West Virginia said last year that allowing the tax credit to go to leased EVs will provoke carmakers to “focus their attention away from trying to invest in North America” for both manufacturing and sourcing materials.
But carmakers want their customers to qualify for the full tax credit, which can boost sales by making EVs cheaper, and many cannot do so under the purchasing requirements. Last month, Rivian, the most competitive of the new, all-electric carmakers after Tesla, announced a new option to lease its R1T pick-up truck.
Korean carmakers Hyundai and Kia have benefited from the trend, say dealers and industry analysts. Leasing gives customers new to the brands a sense of security, and with prices starting at just over $40,000, they are among the least expensive EVs, which typically cost more than petrol-powered cars and trucks.
The brands’ EV offerings are even attracting shoppers who are trading in luxury vehicles. For Kia, only about 6 per cent of the vehicles traded in to purchase a new Kia are luxury models, according to Edmunds. But for the electric Kia EV6, 21 per cent of the trade-ins are luxury cars. The figures are similar for Hyundai.
“This is the cool thing to drive now,” Stephens said. “We’re getting a lot of luxury trade-ins on the Ioniq 5s and Ioniq 6. The EV is so different, they show up to that valet driver with the EV, and it still gets parked in front.”
