Why electric cars are set to become far more affordable: the leasing industry's perspective

Rounding out the series of why electric cars are more expensive, we're diving into the leasing industry's perspective. Exploring how underwriters and the globe's largest financiers will finally bring the monthly price of an electric car down.

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As we’ve discussed, electric cars still demand a premium over their fossil-fuelled counterparts. If it’s more expensive to buy, it’s more expensive to lease - that’s simple economics.

However, it’s a bit more complicated than that.

The vast swathes of people making the switch to all-electric motoring has happened incredibly quickly. Unfortunately, the leasing industry isn’t structured in a way that’s able to respond to dramatic change in buying habits, which has driven the monthly lease cost upwards.

Let’s take a look at how leasing a car actually works and why the switch to electric cars has sent prices all over the place.

Credit: Photo by?Jenny Ueberberg?on?Unsplash

How leasing works

Before offering a monthly price to customers, a leasing company must first calculate the?residual value?of the vehicle. That is, how much the car will be worth at the end of the lease agreement.

This is?the?most important figure for any leasing financier; it’s the figure on which the entire lease agreement hangs from. Once the residual value is calculated, the underwriters work backwards from there and produce the monthly rates at which they can offer the car to customers.?

There’s multiple factors that affect the residual value of a vehicle.?

Key influences are typically mileage and the length of the lease term. This is why when you’re configuring a lease deal, these are the two leading information points after choosing the car.

• Mileage has a well-documented impact on the value of a vehicle; the general rule being the lower the mileage, the more valuable it is.?
• The length of the lease of course dictates how outdated that particular model will be in 24, 36 or 48 months time. If a new iteration of that model is released during the lease term, by the end of the lease that model will have dropped in value.

In short, a lease is all about the risk to reduction of value.

A leasing company’s bottom line is protected by aversion to risk. This ensures profit without the potential of unnecessary fiscal loss. When it comes to salary sacrifice schemes, many providers will over-inflate their prices and pass that risk onto the employer - or purposefully obscure their pricing structure.

At?loveelectric, we make our profit in a way that’s cost-neutral to the employer. It’s all wrapped up in the monthly cost of the lease and is simply a small commission based on the P11D value of the car. We want to be so transparent about our pricing that we’ve even written a?blog outlining the cost to employers, drivers and a rundown of how we make our money.

Why electric cars still cost more to lease

Electric cars are expensive to lease for two reasons:

• Batteries remain a disproportionately high percentage of an electric car’s value
• There aren’t enough electric cars on the used marketplace?

As petrol and diesel cars have been a staple of personal transport for over a century, there’s an abundance of second-hand models filling the used marketplace. 99% of makes and models have a long lineage of previous iterations.?

Credit: Photo by?Hilbert Hill?on?Unsplash

This vast amount of data makes it incredibly easy for financiers to reliably predict the residual value of an ICE vehicle; simply look at the used market and find the same model but 24/36/48 months old with a similar mileage.?

Electric cars simply haven’t had time to proliferate the used car market yet. That makes it difficult for leasing companies to reliably predict how much an electric car will be worth in 2-4 years. To offset this risk, the monthly price of an electric car lease goes up.

Now, onto the battery.

As we’ve previously discussed, batteries are the largest financial asset within an electric car. When purchasing outright, a high percentage of the sticker price is to own the battery that sits beneath the floor panels.

Worries still remain within the financial sector around the degradation of battery packs used within electric cars. Again, this is simply due to a lack of en-masse data. There are plenty of examples that batteries suffer only minor degradation over time -?a Tesla Model 3 covered 100,000 miles and lost only 10% of its capacity?- which is an impressive figure.

Another factor is how quickly advances are being made to improve battery tech. When considering the leaps and bounds made over the past 3 years alone, it’s understandable why leasing companies may be skittish to assume a battery will remain as valuable 48 months later than the day it rolled off the production line.

As it currently stands, banks remain reluctant to drop leasing rates. But there is hope on the horizon. With more evidence proving batteries resist degradation and retain their value, residual prices should stay buoyant and reassure leasing companies.

Plus, leasing through a salary sacrifice reduces the monthly cost of an electric car by a huge margin. Don’t believe us??See how much you could save here.

The future of leasing an electric car

Mike Todd - head of VW’s financial services in the UK - suggests?it’ll take around three to four years before there’s a drop in lease prices.?This is to allow:

• Enough electric cars to hit the used market
• Battery degradation data to be more widely reported
• Residual values to cement rather than remain speculative

As discussed, electric cars hitting the used market are commanding high prices due to demand far outstripping supply. For many, this means that even purchasing an electric car second-hand will remain prohibitively high.

It may sound counterintuitive, but this is good news for leasing deals.

With less risk involved in leasing an electric car, financiers are able to drop the monthly cost to a competitive level - eventually bringing them in line with the current cost of ICE counterparts.?

The?BVRLA estimates 5 million vehicles on Britain’s roads are currently leased. With the impending 2030 ban of new ICE vehicles looming large for motorists and manufacturers alike, it’s an inevitability that leasing an electric car will become the most popular form of personal transportation.

By far the most affordable option, salary sacrifice slashes the monthly cost of an electric car lease compared with a traditional leasing deal. There’s no deposit and everything is included in the per month figure you’re quoted.?Get in touch and find out all the reasons to?loveelectric.