Why heavy discounts on leases could mean losses for automakers

Automakers are turning to aggressive discounts to boost stagnating electric vehicle sales, especially on leases.

Some EVs, and some EV buyers, are not eligible for the $7,500 federal tax credit. High income buyers can’t receive the credit, nor can cars made outside the United States, for example. However, leasing offers a loophole that bypasses all this.

Leasing also gives customers the chance to try out EVs without worrying about having to resell the vehicle at the end of the term.

While this bodes well for customers, and for EV adoption, a recent note from Barclays said automakers may suffer by offering steep lease discounts rather than upfront incentives on purchases.

“We’ve become increasingly concerned about the profitability of notably aggressive lease offerings and believe that OEMs are effectively delaying EV losses with some of the new schemes,” said Dan Levy, senior equity research analyst at Barclays, in the June 11 note. OEM stands for original equipment manufacturer.

About 25% of car buyers leased vehicles during the first quarter of 2024, according to Experian data, but among EV buyers, that number jumps to more than one-third. What’s more, over 70% of EV purchases at dealerships were leased vehicles, according to car shopping website and data provider Edmunds.

“We kept seeing and hearing about really good lease deals,” said Levy. “In fact, a neighbor of mine told me about a deal that he got on leasing an EV. And when I looked at the numbers, I said: ‘That can’t be.'”

But it turned out to be true. Levy’s further research showed a dramatic rise in EV leases.

The trouble is that once these leased vehicles return to dealerships at the end of their terms, automakers are compelled to sell them into the used market. Used EV prices have tanked, and the influx of new vehicles may depress prices even further.

“I don’t think any of those automakers can even really predict, with a high level of accuracy — nor can the guidebooks predict — what’s this vehicle really going to be worth?” said Ivan Drury, director of insights at Edmunds.

Watch the video to learn more.