Electric Vehicle Lending: The Lifespan of the Vehicle vs the Lifespan of the Loan


The defi Team defi INSIGHT, Electric vehicle lending, Originations, Simplifying Processes

Electric Vehicle Lending: The Lifespan of the Vehicle vs the Lifespan of the Loan

The market for electric vehicles is at an all-time high, perhaps driven partly by high prices at the pump. According to the US Department of Energy, 2021 saw about 450 thousand fully electric vehicles sold, not counting hybrids. This was an increase of 85 percent from 2020. According to forecasts by research firm AutoPacific, electric car sales look to reach 670 thousand in 2022 and are expected to top 2.5 million annually by 2027.

The significant growth of the electric vehicle market presents a challenge for lenders, as there isn’t enough data yet to determine how best to finance them. While lenders have plenty of experience lending for transport that isn’t 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

As the largest electric vehicle manufacturer in the United States, three Tesla models accounted for over 76 percent of financed electric vehicle sales in 2021, according to credit reporting agency Experian. Ford and Volkswagen each had a model in the top five financed electric vehicles as well. Yet Tesla doesn’t use a captive financing company, instead offering loans through five banks with which it partners. 

This translates to banks directly financing 55.7 percent of all electric vehicles, a much higher share than the 31.8 percent banks claim in the overall auto financing industry. Captive financing of electric vehicles is the second most common method used by borrowers, at just under 30 percent. While these figures tell an interesting story about how buyers are financing new electric vehicles, what’s even more interesting is what’s propelling this rapid increase in sales.

Reasons for heightened demand of electric 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 electric vehicles. 
  • Greater knowledge among consumers and in the auto industry about electric vehicles.
  • Growing variety of electric vehicle makes and models.
  • Increased range before having to recharge. 

These are all factors leading lenders towards providing consumers with more electric vehicle lending. Lifespans on loans are growing for both gas-powered and electric vehicles as well, in part due to auto prices spiking from supply chain issues involving computer chips and other components resulting from the COVID-19 pandemic. 

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, only a relatively small fraction of loans results from electric vehicle lending. Lifespans of gas-powered vehicles are arguably less than that of electric vehicles, so loan terms for those that are electric-powered will tend to be longer as well. According to research conducted by CivicScience in early 2022, though only about 7 percent of consumers considering purchasing a vehicle intended to buy a fully electric vehicle, only 51 percent intended to buy a gas-powered one. About a fifth of respondents were considering hybrids, while the remainder were uncertain. 

Banks have taken notice of the uptick in interest in electric vehicles in 2022, and options for financing them are growing. For Drive Electric Earth Day, Wells Fargo was the only banking sponsor, while Chase Bank has partnered with electric vehicle startup Rivian as a financier, while also installing charging stations at all 450 branches by the year’s end. 

Smaller lenders are getting in on the action too, with Washington’s Express Credit Union offering loan-to-value ratios that were higher than those for gas-powered vehicles. Green vehicles, especially those that run exclusively on electricity, have prices roughly 10-40 percent higher. For this reason, some lenders are lengthening the lifespans of electric vehicle loans. For example, the OnPoint Community Credit Union in Oregon offers loans through a program that allows loan lifespans covering up to 96 months. 

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 electric vehicles 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 a buyer of an electric vehicle. Lending lifespans will likely increase if it’s determined that electric vehicles 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 electric vehicle’s 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, average loan terms for new cars have steadily increased and now average about 70 months, with the most common term being 72 months. Nearly three-quarters of new auto loans were longer than 60 months for the first quarter of 2022, about a third higher than in 2010. With a gas-powered vehicle, these periods are determined by decades of data that help lenders determine how long it will last. With an electric vehicle, 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. 

Gas-Powered Vehicle Lifespan

A 2017 US Federal Highway Administration survey found the average automobile in a household is driven 10,200 miles annually. Cars under five years old were driven more, up to 13,500 miles. Meanwhile, gas-powered vehicles last on average between 10-15 years or about 150 thousand miles. This means the longer the payment period, the more chance the lender will have of being stuck with an asset that’s not worth the money still owed.

Electric Vehicle Lifespan

While electric vehicles 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, and the market only became significant in the 2010s. Though there’s anecdotal evidence of electric vehicles being driven hundreds of thousands of miles, there’s simply not enough data to determine how long an electric vehicle will last on average. 

When considering electric vehicle lending, lifespan of the vehicle needs to be considered. A 2020 study by Joule estimating the cost of owning an electric vehicle found they’re owned for 15 years and just under 162 thousand miles on average. The study additionally found that electric vehicles cost up to $15 thousand 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 electric vehicle’s regenerative braking system means less wear on brakes. With ever-improving battery technology and other research being funneled into electric vehicles, they’ll likely last even longer than conventional vehicles in the not-so-distant future. 

Electric Vehicle Lending: How defi SOLUTIONS Can Help

As a new concept in transportation, electric vehicles 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 electric vehicles, being longer, will also likely increase the term periods over which borrowers can finance them, and we’re here to support this change. 

Getting Started

defi SOLUTIONS provides configurable loan origination systems, loan management and serving, analytics and reporting, along with a wide range of technology-enabled BPO services for those providing services for both gas-powered and electric vehicle lending. Lifespans of your customers’ leases and loans needn’t be limited by your current lending technology, so take the first step in realizing the benefits defi SOLUTIONS can provide. Contact our team today or register for a demo.

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