Is Leasing an Electric Car a Good Idea?

Many car companies sell all-electric vehicles (EVs). These relatively new types of vehicles are becoming increasingly popular as battery and charging technology improve mileage range and practicality.

Deciding whether to lease or buy an EV is somewhat different than making that decision for a conventionally powered car. In fact, the argument in favor of leasing is stronger.

Why is that?

Electric car drivers tend to drive fewer miles

Due to inherent mileage limits of EVs, drivers tend to use the cars for relatively short distance local driving or commuting. This is ideal for leasing, which limits average mileage use to about 10,000 miles a year.

Electric vehicles tend to lose value rapidly

If you understand leasing, you may know that the future predicted value of a vehicle (residual value) is one of the key factors that determines the cost of a lease. The higher the residual value, the lower the monthly payment.

Electric car values generally depreciate more and faster than normal. This is because the technology is still in its infancy. It’s still unproven and continually changing. Reliability is uncertain. Battery life and replacement costs are big uncertainties.

By the time a typical 3-year lease is over, new improved EVs will be available and the old technology will have reduced value on the used car market.

But if EVs depreciate in value faster than most other cars, it seems it wouldn’t make sense to lease since residual value will be relatively low.

That might be true if car companies weren’t so anxious to get consumers to accept EVs — and that states such as California are mandating specific sales levels of EVs. This has caused car makers to offer electric vehicle leases with relatively high residual values — artificially high — which is a huge benefit to consumers who lease.

So what happens at the end of the lease when the actual market value of a leased EV is much less than the residual value on which the lease was based?

When the leasing consumer (lessee) returns his car, the car company takes the financial hit when the vehicle is sold at auction. They lose money, which they anticipated from the beginning, but felt it necessary at the time.  It would not be to the benefit of the lessee to choose to purchase the car because he would be buying for much more than the vehicle is worth, although the purchase price might be negotiable.

Federal and state tax incentives

The U.S. and state governments are interested in promoting the use of alternative-fuel vehicles to reduce environmental impact. To incentivise consumers to make the switch, governments are offering tax incentives that make the purchase and lease of those vehicle especially attractive.

The Federal government is currently (as of this writing) offering a tax credit of $7500 on all-electric vehicles. Some states are also offering additional state tax credits. This is significant because a tax credit is far more valuable than a tax deduction. In the case of the Federal tax, it means you simply subtract $7500 from your income tax bill next year — repeat, next year — when you file your taxes.

However, automotive consumers who lease their EV get an additional benefit over those who buy. They don’t have to wait until next year when they file taxes to get their $7500. They get it immediately as a $7500 credit toward the cost of their lease from the lease finance company. It’s treated like a $7500 down payment. This is huge, unless you are leasing a $120,000 Tesla.

You see, the lease company is the actual owner of the vehicle and it’s they who get the tax incentive. But they pass it along to the leasing consumer. Having said this, we have noticed a disturbing trend for car companies to keep some of the $7500 for themselves. If you are going to lease soon, make sure you understand how this will be handled.

Summary

There are some special reasons, other than the usual, to consider leasing as the way to finance your new electric car. First, low mileage use, typical of EV driving,  is ideal for leasing. Second, rapid depreciation works against purchasing, but artificially high residuals makes leasing much more attractive. Third, there are immediate Federal and state tax benefits when leasing.