So you want to buy an EV. Good on ya! You’ll never have to buy gasoline again, and if you produce your own power using PV, then you are really helping the planet. However, does it make sense to lease rather than get a loan to purchase that car? Historically, we’ve discouraged auto leasing because you don’t get the benefit of owning a car without monthly payments. But in the current high-interest rate environment and in light of the new law making federal EV tax credits available for leased EVs, it may make more sense to lease your new EV. Here’s our thinking. Take it out for a test drive and come up with your own conclusions:
Federal EV Tax Credits Now Available For Leased EVs
In 2023, the Federal EV Tax Credit became available to customers who leased EVs thanks to the 2022 Inflation Reduction Act. The so-called “EV lease loophole” allows leased electric vehicles to be classified as “commercial vehicles,” making them eligible for the full federal clean vehicle credit without meeting strict battery and sourcing requirements. Note, the manufacturer gets the benefit of the tax credit, but passes along the credit through a reduced monthly lease price.
5-Year Loan for Purchasing an EV:
Some of the advantages:
- Ownership: With a loan, you own the vehicle outright after completing the payments, giving you the flexibility to keep it for as long as you want or sell it later.
- No mileage restrictions: Unlike leases, there are no mileage limitations when you own the vehicle.
- Potential for equity: If you plan to keep the EV for an extended period, you could build equity as the loan balance decreases over time.
Disadvantages:
- Higher overall costs: With current high interest rates, the total interest paid over a 5-year loan can be substantial, increasing the overall cost of ownership.
- Depreciation: EVs tend to depreciate faster than gasoline vehicles, reducing the potential resale value if you decide to sell before the loan is paid off.
- Responsibility for maintenance and repairs: After the warranty period ends, you’ll be responsible for all maintenance and repair costs.
Why a 3-Year Lease for an EV Makes More Sense
Advantages:
- Lower monthly payments: Leases generally have lower monthly payments compared to loan payments for the same vehicle. We found a number of EVs and EV SUVs with sub-$300 monthly payments.
- Manufacturer incentives and discounts: Car companies often provide attractive incentives, discounts, and lower money factors (interest rates) for leased vehicles to promote EVs.
- Federal EV tax credits: As mentioned above, many manufacturers factor in the full federal EV tax credit into the lease price, effectively reducing the overall cost of the lease.
- Always driving a new vehicle: At the end of the 3-year lease, you can return the vehicle and lease a newer model, ensuring you always have access to the latest technology. EVs are relatively new and are constantly improving. Leasing permits you to take advantage of these rapid advances in EV design and manufacturing.
Disadvantages:
- No ownership: At the end of the lease, you don’t have any ownership stake in the vehicle unless you choose to purchase it at the predetermined residual value.
- Mileage limitations: Leases often have annual mileage limits, and exceeding them can result in steep overage fees.
- Potential for wear and tear fees: You may be charged fees for excessive wear and tear when returning the vehicle at the end of the lease.
Our Recommendation
Given the current high interest rates, which increase the overall cost of a 5-year loan, a 3-year lease for an EV could be a more cost-effective option, especially when considering the manufacturer incentives and the ability to fully utilize the federal EV tax credit. However, if you plan to keep the EV for an extended period beyond the 3-year lease term and have predictable driving patterns within the mileage limits, a 5-year loan may be more suitable, assuming interest rates become more favorable in the future.