The Effect of Electric Vehicles (EVs) on the US Auto-Leasing Market

While there are unavoidable hurdles affecting the widespread adoption of EVs, it is undeniable that these ever-expanding options are affecting the auto-retail market despite these challenges. As the EV market grows, it is also beginning to disrupt established norms in the auto-leasing sector. Leasing companies and consumers alike face new challenges and opportunities, from uncertainties around residual values to the impact of charging infrastructure and evolving consumer preferences. These changes are forcing automakers, leasing companies, and financial institutions to adapt quickly to keep pace with the growing shift towards EVs.

The current state of the US auto-leasing market

The US auto-leasing market has become an essential segment of the automotive industry, offering consumers a flexible and cost-effective alternative to traditional car ownership. In the US, in recent years, over 25% of new car transactions, and 46% of EV purchases specifically, have been leases.

The current leasing market

The rising cost of new cars has made leasing an attractive option for budget-conscious consumers while dealerships benefit from higher turnover of vehicles, ensuring that newer models are constantly introduced to the market.

Millennials and Gen Z consumers often prioritize flexibility and technological advancement, making leasing a favorable option that aligns with their lifestyle. In urban areas, leasing is particularly popular due to the shorter distances driven and the desire for smaller, more eco-friendly vehicles, which tend to have better leasing terms.

Key players

The auto-leasing market in the US is dominated by a few key players. Major automakers such as General Motors, Ford, and Toyota offer extensive leasing programs through their in-house financing arms. These automakers often promote leasing to drive sales of new models and maintain a competitive edge by keeping consumers within their brand ecosystem.

In addition to the automakers, third-party leasing companies and financial institutions also play a significant role in the market. Some companies offer leasing options across multiple brands, allowing for greater flexibility for consumers. These third-party lessors often target customers who may be of a lower credit-tier or who are looking for more personalized leasing solutions.

Overall, the US auto-leasing market has established itself as a vital part of the ecosystem. However, as the industry begins to embrace EVs, significant changes are expected in leasing models, consumer preferences, and how companies approach the market.

The rise of EVs in the US auto market

Electric vehicles have been gaining significant traction in the US automotive market, driven by a combination of environmental concerns, technological advances, and supportive government policies. What was once a niche market has now become a central focus for many automakers, leading to a rapid expansion in both the variety and availability of EV models. The growing popularity of EVs is not only reshaping the auto sales landscape, but also influencing leasing dynamics, as consumers consider leasing to access the benefits of this emerging technology without long-term commitment.

Growth of the EV market

The US EV market has seen measurable growth in the past decade. In 2023, EVs accounted for around 8% of all new car sales, an increase from 6% the previous year. This number is expected to increase as both automakers and governments push for greener transportation solutions.

A key factor behind the rise of EVs is the increasing availability of federal and state incentives. For example, the federal government offers a tax credit of up to $7,500 for the purchase or lease of qualifying EVs. Several states provide their own incentives, such as rebates or access to carpool lanes. These incentives have made leasing an EV more affordable and attractive to a broader range of consumers.

EVs vs. traditional combustion engines

One of the most significant benefits is EVs long-term operating costs. EVs have fewer moving parts than ICE vehicles, resulting in lower maintenance expenses. Additionally, electricity is generally cheaper than gasoline, further reducing the cost of ownership.

However, challenges remain. The most cited concerns are range anxiety—the fear of running out of charge before reaching a destination or the next charging station. There are also concerns around the rapid depreciation of EVs, particularly around the battery pack.

How EVs are impacting auto-leasing models

The fundamental differences between electric and ICE vehicles—particularly in terms of technology, depreciation, and infrastructure—are reshaping the way leases are structured, priced, and marketed.

Challenges in leasing EVs

One of the most critical aspects of vehicle leasing is predicting the vehicle’s residual value—its worth at the end of the lease term. For traditional vehicles, residual values are relatively predictable and are based on years of data. However, the rapid pace of technological advancement in EVs makes estimating their future value far more complex. The dominance of one OEM (Tesla) in the market and its pricing volatility is, without doubt, a major challenge for the industry.

This uncertainty has led many leasing companies to offer shorter-term leases more lenient mileage limits on EVs compared to traditional cars, allowing them to reduce the risk of depreciation, technology obsolescence and customer range anxiety. In some cases, automakers have introduced programs that allow customers to swap or upgrade their EVs midway through their lease term, offering flexibility in response to rapid innovation.

Incentives and cost adjustments

Leasing EVs has become more affordable for consumers thanks to various federal and state incentives. The federal government offers tax credits of up to $7,500 for qualifying EVs, and while this incentive typically applies to purchases, it also reduces the cost of leasing since the credit can be factored into the lease pricing. Additionally, many states offer their own incentives, such as rebates or grants, further lowering the monthly payments for leased EVs.

The Federal and State incentives have encouraged automakers and leasing companies to create attractive lease deals to promote EV adoption; Tesla – the dominant player in the market, Chevrolet and Nissan have all utilized them to promote leasing options.

Automaker support and flexibility

To further encourage EV adoption amongst uncertain buyers, many automakers are offering unique leasing programs tailored specifically for electric vehicles. For instance, some manufacturers are incorporating flexible lease options that allow consumers to swap between EVs and ICE vehicles during the lease term, providing a sense of security to consumers who may not yet be ready to fully commit to an electric-only future.

Additionally, automakers are investing in their own leasing arms to support the growth of EV leases. By controlling the leasing process, manufacturers can take more significant risks with residual values and offer more competitive terms to attract customers.

Shifting consumer behavior and preferences due to EVs

This rise of EVs is affecting consumer behavior in the US, as most people embrace the benefits of EV technology, their preferences and expectations are evolving, particularly around sustainability, cost efficiency, and access to the latest technology.

The younger generation is predictably leading the charge towards both EV usage and leasing options. The flexibility offered by leasing options is a key factor for younger demographics, with subscription-based leasing models increasing in popularity among Millennial and Gen Z consumers.

Urban consumers are more likely to lease electric vehicles than their suburban or rural counterparts due to several factors, including access to charging infrastructure, shorter driving distances, and stricter emission regulations in cities. Many urban areas have invested heavily in public charging stations, but suburban and rural consumers face more limited availability of charging infrastructure. Range anxiety remains a concern, particularly in less densely populated regions where public charging stations are sparse.

Automakers and leasing companies are working to address these concerns by partnering with charging providers to install more stations in suburban and rural areas, and by offering leasing deals that include charging incentives or at-home charger installations.

Long-term cost considerations

While electric vehicles currently have a higher upfront price than traditional cars, leasing mitigates this cost barrier by spreading payments over a shorter term and often incorporating incentives into the lease. Additionally, EVs have lower operational costs compared to ICE vehicles, thanks to reduced maintenance needs and lower fuel costs.

However, while operational savings are an important factor, some consumers remain hesitant to commit to long-term EV ownership due to concerns about the pace of technological advancements. Leasing allows them to sidestep this issue. This flexibility to stay at the cutting edge of automotive technology is a major selling point for EV leasing compared to buying.

Industry adaptions and future trends

Automaker strategies and EV leasing programs

Many automakers are now catering to the specific needs of electric vehicle leasing software customers by designing leasing programs that provide consumers with greater flexibility, allowing them to upgrade their vehicles more frequently, increasingly via a subscription model. This approach not only appeals to tech-savvy consumers who want the latest innovations but also mitigates concerns over the obsolescence of EV technology.

Leasing companies adapting to EVs

A major challenge faced by auto-leasing companies is predicting the residual value of electric vehicles, which can be more volatile than that of traditional cars due to new vehicle pricing volatility, rapidly advancing technology, and battery life concerns. Lessors are now using data-driven tools and algorithms to better assess the depreciation of EVs.

Lessors are also managing EV lease terms to address uncertainty over technology obsolescence – shorter and more flexible regarding vehicle switching or early termination.

Collaboration with charging infrastructure providers is another tool to offer incentives for consumers who lease EVs. These partnerships may include discounted access to public charging networks, home charging installation packages, or credits toward charging costs making EVs a more attractive option for a wider range of consumers.

Future trends in the EV leasing market

Looking ahead, several trends are expected to shape the future of the EV leasing market. First, as more states push for aggressive emission reduction goals, leasing companies and automakers will likely continue to introduce EV-specific incentives and programs. Some states, like California, have committed to phasing out new gasoline-powered vehicles by 2035, and are expected to lead the way in promoting EV leasing as a mainstream option for consumers.

Finally, as the cost of EV batteries continues to decline and automakers achieve greater economies of scale, the upfront price difference between electric and traditional vehicles will narrow. This will make leasing an EV more cost-competitive with ICE vehicles, further accelerating the shift toward electric mobility.

Conclusion

The rise of EV usage is transforming the US auto-leasing market, driving changes in leasing models, consumer preferences, and industry strategies. As EV adoption grows, automakers and leasing companies are adapting by offering more flexible lease terms, integrating new technologies to predict residual values, and collaborating with charging infrastructure providers to enhance customer convenience.

Younger generations of consumers are increasingly choosing EV leases due to lower financial commitments, access to the latest technology, flexibility, and environmental concerns. While challenges remain, the market is poised for further growth as these various issues are addressed.

Looking forward, the continued expansion of EV technology and charging infrastructure, coupled with declining costs, will make EV leasing an even more attractive option, ultimately shaping a more sustainable and technologically advanced future for auto-retail in the US.