Charles Krupa/AP Photo
A customer shops for a Volkswagen ID.4 electric vehicle while assisted by a salesman at right, at a car dealership in Manchester, New Hampshire, February 6, 2023.
More than one million electric vehicles were sold in the United States this year, and as technology and driving range improve and more charging stations are built, that number could continue to rise. The acceleration of EV take-up has been bolstered by the $7,500 federal rebate approved in the Inflation Reduction Act (IRA), bringing the price paid for EVs closer to parity with internal combustion engine vehicles.
Starting in 2024, that federal rebate, rather than being applied to the following year’s tax return, will be offered directly at the point of sale. So if the EV costs $50,000, customers will pay $42,500 immediately, rather than having to take a tax credit later.
There is one problem with this, however: New IRA rules to incentivize domestic sourcing for vehicle assembly and parts, including batteries and essential minerals, disqualify models that have components made in China or other foreign countries. For 2024, these rules tighten further, disqualifying the Tesla Model 3 (whose battery is Chinese-made), the Ford Mustang Mach-E (a made-in-Mexico vehicle that was previously eligible for half the credit), and others. Many automakers are unsure about whether their models will still qualify for the rebate, including GM and Volkswagen, whose ID.4 is made in Chattanooga, Tennessee (full disclosure: it’s the vehicle I purchased last year).
This will weaken the consumer’s benefit to going electric, and thereby increase greenhouse gas emissions in the atmosphere. Or at least it would, if there wasn’t a work-around promoted endlessly by auto dealers. While it’s good for the planet that the work-around expands EV access, it’s also a real gift to those dealers, who are reconstituting their business model around financing costs, a dangerous trend for consumers.
The reason? The full $7,500 rebate can be applied to any leased EV, regardless of the level of domestic production or sourcing. Hyundai’s Korean-made cars, Toyota’s Japanese models, and every other EV can all qualify for the rebate, as long as it’s embedded in their leases.
I know this firsthand, because when I was searching for an electric vehicle, it was the first word out of the mouth of every dealer, including the ones whose vehicles qualified for the full rebate. At that time, the rebate wasn’t available at the point of sale, and so it was a selling point for dealers to tell people that by leasing, they could capture the full rebate value immediately. Other dealers let me in on a little secret: I could lease the car, wait 30 days, and then buy out the lease, getting the $7,500 rebate without being locked into financing.
With point-of-sale rebates in effect next year for those cars that qualify, the leasing loophole won’t look quite as attractive. But for car companies that have not moved vehicle or component production to the U.S., the leasing loophole will remain prominent. According to The New York Times, 40 percent of all of Hyundai’s electric vehicles are leased, compared to 5 percent prior to 2023, when the IRA restrictions (and the leasing loophole) took effect.
There are good reasons for EV owners to want to lease. The technology keeps improving and driving range keeps extending, and so not buying a vehicle that you’d hope to keep for the next decade or more could make sense. But there are even better reasons for auto dealers to push leases: They’re incredibly lucrative.
EVs could represent a significant loss for auto dealers, who really make their money in two ways: servicing cars, and financing them.
As Prospect alum Alex Sammon explained at Slate in May, EVs could represent a significant loss for auto dealers, who really make their money in two ways: servicing cars, and financing them. The losses are really centered on the servicing side.
EVs have fewer component parts, and some of what they do have is more durable, particularly the brakes, which suffer from less wear and tear thanks to an EV’s regenerative braking system. Over-the-air software fixes reduce the need for in-dealer visits. EVs also do not require periodic oil changes. Any car owner knows that sending their car to the dealer for routine service like an oil change will inevitably lead to a phone call highlighting six other problems with the vehicle that should be fixed. That opportunity is largely lost to dealers when they sell an EV.
According to McKinsey, whose business it is to know how many dollars companies can extract from you, the average car owner will spend about $565 on parts for a battery-powered EV by 2030, compared to $940 for an internal combustion engine vehicle. That’s a 40 percent savings, most of which comes out of the dealer’s hide.
But there’s that other profit center: financing. EVs are slightly more expensive than gas-powered cars, meaning that they generate more interest. But leasing supercharges this, especially in our high-interest-rate environment. Generally speaking, the more transactions that are financed, the more remunerative it is for the dealer. Getting customers on a lease treadmill, where they trade up for successive models every few years without trade-in value, really helps a dealer’s bottom line.
That’s especially true if the dealer is converting someone to a lease who would otherwise purchase the car outright, or who would have to go somewhere else to capture the EV rebate.
The 30-day lease-to-purchase game wouldn’t seem to be that meaningful for dealers, as they only secure interest charges for one payment. But dealers are aware of human nature and the tendency to procrastinate, as one payment turns into two or three or four. And there’s a lot of up-front interest in those early payments, to say nothing of other charges. (I am again living proof; I did eventually buy out the lease, but not before making a few payments.)
There’s also the point that the “rebate” inside the lease doesn’t really have the same value as a markdown at the point of sale. When I was shopping for an EV, the Hyundai agent was refreshingly blunt about it. He said the $7,500 rebate, when put into a lease, would really only come out to about $1,000 at best. The rest of that is essentially captured by the dealer.
The leasing loophole could delay the shifting of supply chains, though it does appear that the car companies, at least, would rather make the buying process easier and are shifting production and components to America. (The IRA’s manufacturing credits for EV plants help that along.) But perhaps the bigger public costs are to consumer protection. The dealers and the car companies are not totally aligned here; dealers would be all too happy to keep encouraging customers to lease, where plenty of fun with math can take place in ways that rip people off.
Incidentally, the Consumer Financial Protection Bureau is barred by statute from overseeing auto dealers, thanks to a provision written by a member of Congress and former auto dealer named John Campbell in the 2010 Dodd-Frank law. (Amusingly, Campbell’s seat is now held by staunch consumer advocate Katie Porter.) Despite this, the Bureau has been active in fining auto finance companies, as in a recent case against Toyota Motor Credit. As EV leasing becomes more prevalent in the short term, thanks to the loophole, the Bureau is going to have to become more vigilant to make sure dealers are advancing their new profit center honestly.
