The dramatic depreciation of electric vehicles has created a “car leasing crisis” that threatens to increase monthly costs for customers and force them to use older battery models with shorter ranges, experts warn.
The core of the problem is said to be a “fundamental mismatch between new and used electric vehicle market forces”, as massive leasing demand for new battery vehicles is not being met by an equally strong appetite for second-hand electric models. hand.
Leasing companies are said to be losing thousands of pounds every time they introduce an off-contract electric vehicle to the second-hand market due to the falling residual value of electric cars as a result of a lack of public appetite.
To mitigate losses, leasing companies are extending contracts and encouraging new leasing of used electric vehicles.
For motorists using popular tax-advantaged wage sacrifice programs, the value of the vehicle “benefit” decreases as they may be forced to drive older vehicles instead of upgrading to newer electric vehicles with the latest technology they can go. Longer distances in a single charge.
For automakers, contract extensions and re-leasing of electric cars will become another obstacle to achieving the aggressive government-mandated electric vehicle sales targets set out in the Zero Emission Vehicle (ZEV) Mandate. , since this sector will acquire fewer new models.
Experts say there is “no end in sight to the electric vehicle residual value crisis” that is forcing leasing companies to “investigate ways to better postpone exposure to the used market.”
The relatively low demand for used EVs compared to the high volume of new EV leases has triggered a crisis for suppliers.
Auto Data Solutions (ADS), an automotive consulting firm, says that “multiple factors have been converging” to create the crisis, all related to low demand for used electric vehicles.
It says prices for second-hand electric cars – despite suffering a depreciation of around 50 per cent after just one year – are still too high for most buyers.
Auto Trader’s November retail price index shows the average price of a second-hand 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 persist about the infancy of battery technology and how quickly electric vehicles can become obsolete as newer models entering the market.
And there are also major concerns about the projected future values for electric vehicles, which “are not living up to current forecasts.”
Some electric vehicles, which were initially forecast to maintain more than 40 percent of their list price after three years, are achieving sales values in the 20 percent range, he suggested.
On a car with a new list price of £40,000, that’s an unexpected loss of more than £7,000. This problem has already cost leasing companies “hundreds of millions of pounds”, according to the report.
“Heavy discounts on new EVs are further reducing the value of used EVs,” he added, while pointing to the cost of living crisis and consumer uncertainty.exacerbating the situation.”
He says this is to “let the industry explore ways to generate as much revenue as possible from existing assets through lease extensions or offering used electric vehicle leasing as a service.”
Leasing companies are said to lose thousands of pounds every time they put an off-contract electric vehicle on the second-hand market.
What impact will it have on drivers and automakers?
The result of low demand for used electric vehicles could see customers facing difficulties in securing lease deals for new electric cars 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 from disposing of ex-leased vehicles.
Manufacturers will also be affected by any reduction in demand for new products due to lease extensions.
Historically, automakers used the daily rental sector to offload excess vehicles during periods of weaker demand, but electric vehicles are widely considered unsuitable for that role.
“This is not anti-EV sentiment and it is clear that the leasing sector fully supports the transition to zero-carbon driving,” says Amanda Morgan, commercial director and leasing sector leader at ADS.
He added that the “pace of success of electric vehicles” for leasing companies due to the popularity of salary sacrifice and leasing agreements in general has created this “imbalance between the demands of the new and used car markets.”
For this reason, he states that several companies are already renting electric vehicles without a contract.
Amanda warns: ‘We are seeing recent analysis conducted across the fleet and finance sectors indicating that there is no end in sight to the EV residual value crisis and that companies are investigating ways to better postpone exposure to the EV market. used.
“That means extending existing contracts wherever possible, to maintain revenue, and also re-leasing ex-contracted vehicles rather than returning them to the market.”
Vehicle leasing companies are now starting to offer re-leased used electric vehicles to customers who might be stuck with models with outdated technology.
Higher-than-expected depreciation for electric vehicles is also hitting finance providers, already facing billions of pounds in compensation payments linked to the sector’s mis-selling scandal.
Around eight in ten new cars purchased by retail customers are through finance rather than direct cash purchases. And PCP (Personal Contract Purchases) is by far the most common form of financing.
Monthly PCP costs, typically over a three-year period, are determined by the expected value of the car at the end of the contract.
The amount of the deposit paid at the beginning of the contract and the estimated residual value are subtracted from the price of the vehicle to calculate the remaining cost which is distributed in monthly installments.
This means that customers will pay the depreciation value during the contracted period.
Once the contract is coming to an end, they can choose to keep the electric car by paying the previously agreed residual value: this is called a “balloon payment”.
However, with electric vehicle values falling faster than expected, this will almost always be greater than the current market value of the car, which is why most finance users decide to return the car and start a new contract for another vehicle.
As such, finance providers are left with large volumes of used EVs at a loss.
When these electric vehicles are launched into an already saturated second-hand market at a time when demand is low, it helps anchor values.
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