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ELECTRIC VEHICLE LENDING VS. GAS: WHAT TO KNOW AND WHY IT’S IMPORTANT

The defi Team defi INSIGHT, Electric vehicle lending, Originations

Sales of electric and hybrid light-duty vehicles in the United States nearly doubled between 2020 and 2021 to over 600 thousand, with fully electric vehicles accounting for 73 percent of these 2021 sales. This is remarkable, as overall sales of light-duty vehicles increased only 3 percent over the same period. Multinational investment bank UBS predicts that 20 percent of all new vehicles sold worldwide will be electric by 2025. By 2030, this will rise to 40 percent, and by 2040 nearly all global vehicle sales will be electric. 

This is largely due to what manufacturers are learning about electric vehicle fabrication, which is bringing prices down. This is a common occurrence when new products come onto the market, and it’s why many goods—including cars powered by internal combustion engines—became so popular in the 20th century. While the auto industry shifts from making gas-powered to electric vehicles, the auto finance sector will look more closely at electric vehicle lending vs. gas-powered conventional vehicle financing. 

Financing Changes in the Auto Lending Industry

COVID-19 caused a significant shift in electric vehicle sales globally, which accelerated in 2020 despite the economic disruption brought on by the pandemic. Though sales in the United States have been growing more slowly than elsewhere, the current US administration has called for a target of 50 percent of vehicles on the road in the country being electric by 2030. Meanwhile, US original equipment manufacturers (OEM) support a ban on internal combustion engines by 2035. 

This puts the United States only slightly behind the rest of the world when it comes to adopting electric vehicles. Three factors will affect the adoption of electric vehicles in the United States and worldwide, which include: government policy, consumer attitudes, and technology. 

Government Policy

While most US states offer tax credits and other incentives for consumers who purchase electric vehicles, the current US administration is driving policies that will expand infrastructure for electric vehicles nationwide. The EV Charging Action Plan, in conjunction with the Bipartisan Infrastructure Law, outlines strategies for developing and deploying charging infrastructure throughout the country. Further, it focuses on disadvantaged, less accessible, and rural areas expanding the potential market for electric vehicles. 

This will grow the market for electric vehicles, which has been primarily geared towards higher income brackets. However, as the electric vehicle market opens to people with lower incomes, lenders may need to change how they approach such applicants to mitigate risk. In contrast, the electrification of state-owned vehicle fleets will help drive sales of mid-priced electric vehicles, including policy changes in states that include Connecticut, Maine, Illinois, Washington, Massachusetts, Oregon, and others. 

Consumer Attitudes

Meanwhile, the pandemic has caused commuters to continue to avoid public transportation, usage of which remains below 2020 levels due to residual hygiene concerns from the pandemic. This has resulted in cities like New York conducting ad campaigns to promote public transportation safety. Additionally, ride-sharing and car-sharing have scaled back for the same reason. Overall, road travel in North America has dropped by 11 percent, partly due to rising costs and remote work reducing the need for commutes. 

Adding to this is the rise in popularity of micro-mobility within cities, which has put the focus on smaller electric vehicles. For example, US sales of electric bicycles doubled in 2020, while the stock of two and three-wheeled electric vehicles worldwide is approaching 300 million. Already accounting for a third of total sales of this vehicle type, these electric vehicles also include scooters and other smaller, lightweight vehicles that travel typically at less than 30 mph (48 kph) and weigh less than 500 lbs. (230 kg). To enter this primarily urban-based market, electric vehicle lenders could provide smaller loans to finance these vehicles for customers who would be less likely to own conventional gas-powered automobiles.

Technology

As technological advancement within the industry accelerates, new technology within electric vehicles also progresses. Hundreds of billions of dollars have been invested in electric vehicles over the past decade, with much of the development focusing on connected and autonomous aspects. These technological innovations are bringing down the costs of owning an electric vehicle, presenting new opportunities to auto lenders for financing them. 

Electric Vehicle Lending vs. Gas-Powered Vehicle Lending 

Lending for conventional gas-powered vehicles won’t end any time soon, as auto companies will continue to make internal combustion engines for the foreseeable future. But knowing the differences between electric vehicle lending vs. gas-powered vehicle financing will be of growing importance as the auto market shifts towards electrification. As electric vehicles are considered “green,” car loans for them are also often referred to as “green auto loans.” 

Benefits of green auto loans for electric vehicles include:

  • Additional discounts for those choosing paperless billing.
  • Allows for generally longer loan terms in order to reduce monthly payments.
  • APRs fixed and based on credit score of applicant.
  • Covers higher loan amounts.
  • Interest rates at least 1 percentage point lower than auto loans for conventional vehicles. 
  • Loans often cover costs for licensing, registration, taxes and other benefits regular auto loans don’t cover.
  • Pre-approved financing. 

Financing electric vehicles is essentially the same as conventional gas-powered vehicles. Yet, due to the tax credits and other governmental incentives associated with these loans, lenders may be more flexible with terms, at least for the foreseeable future. 

Fintech & Electric Vehicle Lending

By working with investors and capital markets that focus on sustainability, certain fintech startups are working to make electric vehicles more accessible. Enabling access to cheaper capital allows them to pass this savings to borrowers in the form of lower interest rates than would be possible with traditional lending formats. 

Electric Vehicle Lending vs. Leasing

A major difference between electric and conventional vehicles involves consumers choosing to lease rather than buy. According to Bloomberg New Energy Finance, about 80 percent of electric vehicles are leased, while only 30 percent of conventional gas-powered vehicles are leased. Though this excludes Tesla, which sells directly to the consumer and doesn’t report data on leases, this shows the difference in how consumers approach getting a new electric vehicle. There are definite benefits to leasing an electric vehicle vs. borrowing for one. 

Benefits of leasing over purchasing electric vehicles include: 

  • Avoiding depreciation: For the same reason consumers lease conventional gas-powered vehicles to prevent dealing with steep devaluations, they’ll benefit from leasing electric ones. 
  • Battery degradation: As electric vehicle battery technology is still very new, there’s not yet enough data on older ones and how much their batteries degrade over time, so getting a new electric car with a new battery every couple of years resolves this issue.
  • Incentives: With federal and state governments rewarding electric vehicle purchasers to support a cleaner environment and reduced carbon footprint, it actually makes financial sense to take advantage of these rebates more often. 
  • Loyalty bonuses: When renewing a lease of a conventional vehicle, many lease providers offer bonuses to retain their customers—the same will likely be true for electric vehicles as well. 
  • Upgrading technology: As electric vehicles are rapidly advancing, it’s much easier to lease a new car every couple of years to take advantage of features like extended range, more durable battery, faster charging times, and other technological advancements.

Leasing as a form of financing may also open up a new market. As leases expire for electric vehicles, these used electric vehicles will need to be resold. Offering remarketing opportunities for these pre-owned vehicles may prove to open up the electric vehicle market to even more consumers.

Getting Started

defi SOLUTIONS offers a total solution for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. Including decisions regarding electric vehicle lending vs. gas-powered vehicle financing, defi sets new standards for flexibility, configurability, and scalability in originations and servicing (by your experts or ours). defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information, please visit www.defisolutions.com.

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