Is Leasing An Electric Vehicle The Best Option?

That is a question that many of us will ponder as more battery-powered vehicles appear in showrooms in the next few years. Most car buyers view vehicle ownership economics mainly through their monthly payment. However, the most important data point is the car’s worth when it’s traded in or, worse, when your insurance company totals the vehicle after an accident and awards you the depreciated value.

We have more than 60 years of data that can reasonably predict the depreciation curves of every make and model sold in the U.S. This data reflects real life experience that makes some models hold their value better than others. These include the cost of maintaining an aging vehicle; its reputation for durability; and, therefore, its desirability in the used car market. Ultimately, neither the dealer nor the automaker sets the car’s value. Rather, the value is determined by the amount of money someone is willing to pay for the car as it moves from the first owner to the second, third, etc. In the 1980s and 1990s, vehicles produced by GM, Ford, and Chrysler experienced faster depreciation compared to major Japanese automakers. This contributed to domestic brands’ loss of market share, reputation for inferior quality, and need to subsidize the depreciation gap with cash incentives.

In 2018, the average age of America’s car population was 11.8 years, up from 11.4 years in 2014. We’re keeping our cars longer as evidenced not only by the continuous aging, but also by the fact that cars 16-years-old and older comprise the fastest growing segment of the vehicle population. With that fact in mind, a 2020 model might have four or more owners before it goes to salvage. Each time the car changes hands, the cost of ownership reflects the price paid less the value when the car is sold.

Modern cars equipped with internal combustion engines have a much longer life expectancy than the average car from the 1980s. Contemporary cars don’t rust; engines and transmissions are more durable; and replacement parts, including body panels and mechanical components, are harvested from salvaged vehicles, thus enabling very old vehicles to be repaired economically.

The full battery-powered car raises important questions for prospective buyers not only because of a lack of historic wholesale price data, but also because of factors unique to the batteries. First, battery technology will continue to evolve, resulting in both a longer life expectancy and a greater range, thus obsoleting models with early generations of lithium ion batteries. Furthermore, batteries degrade due to charging frequency, ambient temperature, and overcharging to or above 90 percent of capacity. So while a 10-year-old ICE-powered car might have more than six additional years of life on the road, the same might not be said for battery electric vehicles (BEVs). Since the battery accounts for about a third of the car’s cost, the economics don’t favor battery replacement in older cars. And until there is sufficient data, finding buyers for a high mileage, 8-year-old, full electric car might be difficult.

Tesla’s battery warranties vary, with the high priced S and X models allowing 125,000 miles or eight years, whichever comes first. The Model 3 also has an 8-year warranty, but the mileage allowance ranges between 100,000 and 120,000 miles with 70 percent battery retention. At 70 percent or less, a driver notices enough degradation in acceleration and range to know it’s time for a replacement battery or car. While the Tesla warranties are longer than on conventional engines, there is ample data that demonstrates longer engine life over batteries and lower cost to repair or replace the engine.

Given the uncertainties with respect to battery life and replacement cost, BEV owners will probably replace their cars when they still have enough battery life and warranty coverage to appeal to a second buyer. But what about the sale from the second to the third owner? The lithium ion battery could cost more than the car’s value when it exceeds the manufacturer’s warranty limits. Even if BEV battery life proves to be greater, it still poses a risk that owners of cars with internal combustion engines don’t have.

I have no doubt that BEVs will reach the range equal to a tank of gasoline, but the biggest risk to their broader acceptance will be how fast the car’s value depreciates to its scrap value. Used car values underpin the entire new and used car marketplace. Until these questions are answered – and second and third owners can confidently expect promised performance and future value – leasing will remain the better option for the first owner, which forces the automaker to deal with the real life issues of the actual value of its used cars, including the value risk to the buyer of the 3- or 4-year-old unit.

This story was originally published in forbes