ELECTRIC VEHICLE LENDING: 2025 GUIDE FOR LENDERS

The market for electric vehicles (EVs) is at an all-time high. According to market research firm Rho Motion, worldwide EV sales increased 25 percent in 2024 compared to 2023, topping 17 million vehicles. In the United States, EV sales jumped 21 percent year-over-year, reaching 1.7 million vehicles in 2024. These statistics underscore the dynamic and rapidly evolving nature of the EV market.

Reasons for heightened demand of EVs vehicles include:

• Better charging infrastructure, with more charging stations available over a broader area. 
• Diversity in price ranges and types of vehicles. 
• Environmental benefits of EV. 
• Greater knowledge among consumers and in the auto industry about EVs.
• Growing variety of EV makes and models.
• Increased range before having to recharge. 

The significant growth of the EV market presents lenders with some challenges. While lenders have plenty of experience lending for transport that isn’t electric, electric vehicle lending lifespans face uncertainty due to the lack of familiarity with this market sector. However, as more cars are sold and more data becomes available, these challenges will turn into opportunities for lenders prepared to take risks. 

The Future of the Electric Vehicle Market

According to credit reporting agency Experian, 10.1 percent of new U.S. vehicle financing in the third quarter of 2024 were EVs, a 30 percent increase from the same quarter last year. In addition, 45 percent of EV owners leased their vehicle in the 2024 third quarter, accounting for 17.3 percent of all new U.S. vehicle leasing.

Financing for Electric Vehicles

The length of the loan is often determined by how long a vehicle is expected to last. When it comes to auto financing, a small but growing fraction of loans results from electric vehicle lending. Lifespans of gas-powered vehicles are arguably less than that of EVs, so loan terms for those that are electric-powered will tend to be longer as well. 

Banks are taking notice of the uptick in interest in EVs, and options for financing them are growing. Whereas banks held 46.8 percent market share in EV financing in Q1 2023, they have been replaced in the last year by captive finance companies who now make up nearly 60% of the market. Banks follow behind at 22.65% while credit unions (10.07%) and finance companies (6.52%) bring up the rear. 

Switching the Focus from Depreciation to Customer Experience

Models for auto finance of gas-powered vehicles typically focus on depreciation, as lenders want the asset’s value to be more than the amount the borrower owes. Yet depreciation of EVs over time isn’t a known quantity, creating uncertainty for lenders. Aspects such as how long batteries will last, declining performance over time, and other factors all play a part in determining resale value. 

Due to these uncertainties, there will probably be significant differences in financing models for an EV buyer. Lending lifespans will likely increase if it’s determined that EVs last significantly longer, while the huge cost of batteries may cause them to depreciate more quickly after a certain point. This would in turn limit the period over which lenders would comfortably provide auto loans to consumers for electrically powered transport.

To accurately determine an EV lifespan and value when sold secondhand, a larger dataset needs to be evaluated, along with additional data sources. This will remove focus from depreciation to the overall lifecycle of a vehicle and instead shift it more towards the true value of the asset and borrower-lender relationships. 

Gas vs. Electric: Vehicle Lending Lifespan Differences 

Taking out a loan depends on several factors, among them is how long the vehicle will last. An old rule of thumb for buying vehicles suggests a car buyer should put down 20 percent, accept a lending period of no more than four years, and make payments that are no more than 10 percent of take-home pay. Both new and old vehicles have gotten so expensive, however, that this rule no longer applies to many auto buyers. 

Today, the average loan term for new cars is 68.48 months in the second quarter of 2024, according to Experian data. This average can be broken based on credit score: 64.04 months for super prime (credit score of 781-850), 71.41 months for prime (661-780), 74.13 for near prime (601-660), 73.39 months for subprime (501-600), and 72.24 months for deep subprime (300-500). 

With a gas-powered vehicle, these loan terms are determined by decades of data that help lenders determine how long it will last. With an EV, lending lifespans don’t have enough historical data to determine how long it’s likely to last. This is the key conundrum lenders face when deciding on terms for an electric auto loan. 

Electric Vehicle Lifespan

While EVs have been around since the 19th century, it wasn’t until after 2008 and Tesla’s entry into the auto market that they began to appear on roads in any significant numbers. The market only became significant in the 2010s. Though there’s anecdotal evidence of EVs being driven hundreds of thousands of miles, there’s simply not enough data to determine how long an EV will last on average. 

When considering electric vehicle lending, lifespan of the vehicle needs to be considered. A study by Joule found that the average lifespan of an EV is 15 years, and it is driven just under 162,000 miles on average. The study also found that EVs cost up to $15,000 less than gas-powered vehicles over their lifetimes, much of this due to lower fuel and maintenance costs. 

As electric motors have considerably fewer moving parts than internal combustion engines, the wear and tear on them would logically be less. Additionally, an EV’s regenerative braking system means less wear on brakes. With ever-improving battery technology and other research being funneled into EVs, they’ll likely last even longer than conventional vehicles in the not-so-distant future. 

Electric Vehicle Lending: How defi SOLUTIONS Can Help

EVs are making waves in the auto lending industry, and defi SOLUTIONS is at the forefront of this change. We’re looking to support lenders’ customers when they look into purchasing extended life batteries, new in-vehicle entertainment systems, an upgraded electric motor with more torque, or any other change that could trigger a shift in loan conditions. With end-to-end loan capabilities, we’ll be there to provide value to lenders and their customers.  

As a leader in technological solutions and outsourced loan servicing support for the consumer lending industry, defi SOLUTIONS offers innovative tools and services for any lending institution. Our data-based solutions are ideal for lenders looking to delve into electric vehicle lending. Lifespans of EVs, being longer, will also likely increase the term periods over which borrowers can finance them, and we’re here to support this change.