The Growing Popularity of EV Leasing

Over the last 18 months, there has been a significant shift toward leasing for electric vehicles in the United States — driven both by market dynamics and federal legislation.

Looking first at industry dynamics, vehicle inventories have grown as the pandemic and microchip shortage have receded. These changes have also shifted the market from a seller's market to a buyer's market. As buyers have gained more leverage, downward pressure on pricing has intensified.

One major tool used to lower prices, particularly for luxury vehicles, is leasing. We have seen a growing percentage of leased new vehicles since the second half of 2022, as shown in Figure 1. From its low point of 17.1% in Q3 2022, lease mix has climbed more than 8 percentage points to 25.6% this past April and May. Note that most of leasing gains have come at the expense of loans, while cash mix has remained relatively stable since the end of 2022.

But federal legislation, and specifically the Inflation Reduction Act (IRA) signed into law by President Biden in August of 2022, has also contributed to this shift. Specifically, the IRA allows most EV leases to qualify for a $7,500 tax credit, in contrast to loans, which have numerous qualifications. These additional funds provided by the IRA have also enabled dealers to offer attractive EV lease monthly payments, relative to loan payments.

As Figure 2 demonstrates, lease payments for luxury EVs rose substantially at the start of 2020 when the pandemic arrived and stayed elevated through much of 2022. But, starting at the end of 2022 soon after the IRA went into effect, lease payments began to decline both in absolute numbers and relative to loan payments. And, in the first five months of this year, luxury EV lease payments have fallen below loan payments (a more normal relative position for them based on history).

The same trends have occurred in the mainstream EV market, as illustrated by Figure 3. In the mainstream space, EV lease payments have been below loan payments throughout the displayed time period, but the gap began to widen shortly after the IRA adoption date, and since Q3 2023 the difference between the two metrics has increased dramatically.

This increased value proposition of leasing EVs, relative to purchasing them, understandably has driven lease levels to exceptionally high levels. While industry-wide lease mix has only risen slightly in the last several months, the EV lease mix among mainstream products has climbed from 4.9% in Q4 2022 to 63.6% this past April and May; similarly, lease penetration in the luxury EV sector has jumped from 8.6% in Q3 2022 to 42.7% in April and May.

At the model level, these financing dynamics have brought some extraordinary results. In the first five months of this year, 22 models, including 17 luxury models, had a lease penetration greater than 80%, and 14 of these models enjoyed a lease mix above 90%. While the luxury space traditionally has a higher lease mix than the mainstream market, such a high number of models with exceptionally high leasing business is rare.

These data point to at least three conclusions. An obvious one is that if a brand wants to compete in the EV space, it needs to be an aggressive player in the leasing business. Succeeding in this endeavor requires an active, established, and competitive captive finance source.

A second takeaway is that governmental regulations, whether at the state or national level, can still be used to shift the market in a direction favored by those in power.

And lastly, these data suggest that the EV market continues to be in its early stages and therefore subject to rapid fluctuations depending on regulations, incentives, new models, discontinued models, other fuel type availability, and the final value proposition for the consumer.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.