Pirate's Cove

In case you’ve never leased a vehicle before, here’s how it works. You’re paying for the depreciation, leaving the rest as the residual value, plus an interest fee, what’s called the money factor. This is set by the manufacturer. You have to qualify for one of the tiers in order to be able to do it, based on credit and such. If you aren’t tier one or tier two, it’s usually not worth doing, unless you are writing it off. Same with picking mileage above 15K a year. The manufacturers have a pretty good idea what the residual value will be after the agreed term (which is why a total redesign can be more expensive to lease for at least the first 6 months to a year), so, there is little risk for either them or the consumer. What happens when the residual value, ie, what the car is actually worth, crashes?

Leasing Companies Are Demanding Payoffs from EV Makers Like Tesla as Resale Values Plummet

Car leasing companies are feeling the pinch as electric vehicle resale values tumble, prompting demands for compensation from automakers trying to meet strict emissions targets.

Fortune reports that the market for used electric cars has taken a massive hit since Tesla slashed prices last year, forcing other manufacturers to follow suit. This has impacted companies like Europe’s largest multi-brand leasing firms Ayvens and Arval, which serve as middlemen in the critical corporate car market that makes up around 60 percent of European sales.

According to Ayvens CEO Tim Albertsen, the company has already received compensation checks in recent weeks from carmakers to cover the cratering prices of leased EVs returned at the end of their contracts. Leasing agreements typically factor in an estimated residual value, with payments designed to cover expected depreciation. But with values dropping more than predicted, the leasing firms take a loss when selling those vehicles.

Now companies like Ayvens are pushing manufacturers for protections, including buyback guarantees to safeguard against further erosion in the $1.2 trillion used EV market. “Manufacturers today need to keep selling EVs,” said Albertsen. “We then need some kind of protection from the manufacturers in terms of their future pricing.”

Well, that is the danger of companies not owned by the manufacturer assuming the leasing of the vehicles. The manufacturer doesn’t have the financial incentive to keep the residual values high.

Manufacturers are responding by guaranteeing buybacks, shifting risk into the future. But carmakers remain responsible for eventually finding used EV buyers at decent prices, or taking writedowns. With demand “artificially stoked” by incentives and ending after the second-hand market, this distorted dynamic poses serious challenges, said auto expert Ursula Weigl.

Here’s the thing: if you financed one, the value of your vehicle has also plummeted, so, when you go to trade it in or sell it, it will be worth thousands less than it should have been. Kind of the reverse of what happened after COVID hit, with used car values being about $6,000 to $8,000 more than they should have been. So, those people who paid ridiculous prices now have massive negative equity, way more than they should have had. They’re being told either come up with some good down payment or just ride out the loan. Learn to love the car.