Is It Smarter To Buy Or Lease An EV?
Michael Bettencourt is a long-time EV owner, both of BEV and PHEV vehicles, and automotive journalist whose vehicle reviews have specialized in EVs and plug-in hybrids for the past 10 years. We’re following Michael in a new series about the experience of EV ownership, in the short and long term.
The age-old “Should I buy or lease my next vehicle?” debate has never been a cut-and-dry one, as the right answer for you may vary from your neighbor’s, depending on your driving patterns and overall buying priorities.
But that debate takes a graduate-level increase in required research if you’d like to maximize your savings when it comes to buying or leasing an electric vehicle (EV). Especially since the rules governing the $7,500 federal U.S. rebate have shifted so radically as of April 18, 2023.
That’s when new rules brought on by the Inflation Reduction Act (IRA) changed the parameters around which electric vehicles would be eligible for federal government rebates, and introduced tougher new rules around domestic sourcing of critical minerals and battery materials.
And changes will keep coming as soon as January 1, 2024, with plans for increasingly stringent content rules that could annually adjust which vehicles are eligible for all or a portion of the $7,500 government incentive each year until 2029.
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IRA Kept $7,500 Rebate On Some EVs, But Not Many
Instead of discussing the 2024 changes, which were covered nicely in detail here, let’s go over the current EV rules to the end of 2023 in case you’d like to buy an EV before ringing in the new year. As of the beginning of this year, to receive the full $7,500 that was previously available to all EV sales until each automaker hit a limit of 200,000 units, the federal government added the requirement that all eligible vehicles must be built in North America.
This is what has excluded worthy EVs such as the Hyundai Ioniq 5, Kia EV6, and Nissan Ariya from tax credit eligibility, as none of those vehicles – nor many of the new BEVs or PHEVs for sale in the U.S. – are currently built in North America.
The federal government added the requirement that all eligible vehicles must be built in North America.
As before, the government funds are currently issued as a credit on an EV owner’s taxes for that year, meaning if you owed $4,000, that’s how much the EV tax credit was worth when you filed the following year, even if the vehicle was eligible for the full $7,500.
As of mid-April 2023, though, new rules were introduced that also added vehicle price caps for eligibility ($80,000 for SUVs, vans, and pickups, and $55,000 for everything else), plus new sourcing requirements for battery materials. These also maxed out the amount of gross income you could make and still receive the tax credit: $150,000 for individual filers, or $300,000 in household income.
There’s another level of research needed when it comes to scoring the best deal possible on EVs.
The battery and critical minerals measurements are the least transparent of all these new rules. For example, the Nissan Leaf sold in the U.S. has been built in Smyrna, Tennessee for over 10 years, along with its battery, but a 2023 Leaf acquired after April 18 is not eligible for any federal EV incentive, according to the EPA’s fueleconomy.gov site. Had the same buyer bought that vehicle between January 1 and April 17 of this year, no matter their income, it would have been eligible for the full $7,500. And the mechanically identical 2024 Leaf, since mid-April, is now only eligible for a $3,750 tax credit.
Clearly, there’s another level of research needed when it comes to scoring the best deal possible on EVs.
So be sure to visit the EPA’s site’s tax rebate section where you can plug in the year, make, and model to ensure what incentive it’s eligible for, which may shift from here to the end of the decade. Plus it details other key criteria mentioned here, and likely any new measures as the system is updated and refined.
Leasing Is A Key EV Incentive Loophole
Considering all these tax credit changes, leasing has become the equivalent of a shining north star for some EV buyers, guiding them like a bright LED beacon in the night through a forest of dark and somewhat mysterious eligibility rules. A leased vehicle is basically a long-term rental, typically owned by the automaker’s or dealer group’s finance arm and not currently subject to the rest of the new EV requirements: price limits, income thresholds, where it’s made, nor any battery or mineral content requirements.
This seems like a good time to point out that government incentive programs can and do change, as this one has already multiple times. But unlike most automaker EV price cuts, there is often a grace period or implementation time frame where plugged-in shoppers can evaluate and perhaps measure upcoming changes on the government EV incentive front.
One major change coming January 1, 2024 is a good example: it will change the buying incentive from an EV tax credit to a point-of-sale EV tax rebate. This will make the federal incentive work for buying an EV outright very much like how EV leasing works now, except for the aforementioned vehicle and consumer restrictions, with both partial and full $7,500 amounts available.
You’ll no longer have to pay the full price of the car and wait for your rebate come tax season; it will be applied right there at the dealer when you buy an eligible EV.
A word to the wise, however: recent dealer guidance by the Treasury Department on how it will all work suggests this will be a major undertaking, both from a dealer and consumer education basis. The process of providing consumers instant federal rebate approval while out (or online) car shopping will be a brand-new government initiative in a process that will be streamlined and adjusted as it goes along.
You’ll no longer have to pay the full price of the car and wait for your rebate come tax season; it will be applied right there at the dealer when you buy an eligible EV.
So if you’ve been holding off on an EV purchase to the first week of January in order to take advantage of this instant dealer rebate, you may want to check with your dealer of choice (or a few nearby ones) soon to confirm they’re setting up to provide those instant rebates early in 2024.
Alternatively, if you’re not confident in either the government or your local dealer’s ability to launch this program smoothly early next year, consider taking advantage of end-of-quarter and year-end deals before the end of 2023. Then you can file your taxes early in 2024, which is another, if much-less-satisfying, way to speed up your government EV tax savings.
One of the benefits of the government’s planned point-of-sale tax rebate is that the dealer must pass along the full value of this government rebate to the consumer. When it comes to EV leasing, the finance company that technically owns the EV has no such requirement and can keep some or all of it for itself.
It’s true that most pass along the majority of the available savings, whether the full $7,500 for most BEVs (but half of that for both Rivian models and the Leaf), or the $3,750 that’s earmarked for most plug-in hybrid models. There are some PHEVs that manage to qualify for the full $7,500 too, such as the Chrysler Pacifica Hybrid minivan and Lincoln Aviator Grand Touring SUV.
So it’s worth researching the amount of federal rebate your intended lease is eligible for, and ask specifically whether or not the full rebate is applied somewhere on the itemized leasing contract.
Tesla Offers Leasing, With One Thing Missing
Another key clause to check is if there’s an option to purchase the EV after its lease term for an agreed residual price. Tesla, for instance, no longer allows a balloon payment at the end to purchase the leased vehicle, arguing in 2019 that it would need the leased Model 3s returned because “we plan to use those vehicles in the (FSD-enabled) Tesla ride-hailing network,” the company argued.
That network never appeared, but record used vehicle profits sure did, especially when used vehicle prices skyrocketed amongst pandemic and supply chain-related vehicle shortages.
Ford was initially not allowing its EVs to be bought out at the end of leases for its F-150 Lightning and Mustang Mach-E, but that changed once inventories of both models began to grow. So be sure to check this key lease clause for whatever EV you’re considering, and if it’s not there, remember that takes away one of the key and potentially lucrative benefits of leasing, at least over the past few years.
And keep in mind that if you lease an EV and receive the $7,500 rebate either through your dealer or directly, you can’t then turn around three years later and apply for a used federal EV rebate on that same vehicle if you purchase it at the end of the lease contract. The government’s recent guidance just clarified even if your vehicle is now worth less than $25,000 and meets all other used EV rebate criteria at the end of its lease, buying it outright will not get you the used EV rebate.
Tips And Tricks For EV Buying And Leasing
When we were in the market for our first EV, I was fairly sure we would lease it. That is, until I realized the lease’s interest rate was high enough over the financing rate that I’d effectively be paying the same price per month on our new Leaf, just on a slightly shorter term. I opted to buy instead, as it left us with some equity at the end of four years of payments, versus a big hole of nothing after 39 months.
As it turns out, most lease rates are traditionally a couple percentage points higher than financing rates. And both types of interest rates are high right now, making it an ideal time for buyers to use some savings or liquid assets instead of dealer or bank financing.
Remember, a lease payment starts on the basis of how much the OEM believes the EV will be worth at the end of the agreement, then divides up that depreciation over the term, then adds interest to cover borrowing costs (and help profits) over that time period. And these residual estimates can be spectacularly wrong for EVs, as we’ve seen the past few years, but also for regular internal combustion vehicles.
Giving the consumer the option of buying out the lease at the end of the term provides a helpful financial lever to potentially wring out a bit more value from of a lease if these cars end up being worth more than planned. I came to realize that Nissan had no real idea where the true residual value of that early Leaf would be in 39 months, so it gave itself a healthy financial cushion with its lease offer, steering me towards financing and taking on that heavier depreciation risk.
Whether leasing or buying, make sure to check for all state, municipal, district, and utility discounts for potential green vehicle rebates, which may also include deals or rebates on EV charger purchases and installs. This California buyer found four government rebates in total, plus Tesla inventory and referral discounts, which added up to $23,000 in total discounts. States like Colorado and New Jersey also have healthy local incentives, some of them income-dependent and with their own set of rules worth further research.
As with most vehicle purchases, it’s helpful to know the interest rates you’re eligible for going in, so check your bank or credit union’s auto and general line of credit (LOC) terms. Also look into the rough value of your trade-in from online instant price sites, but keep in mind the potential tax and financing savings (and convenience and safety factor) by trading in your vehicle straight away.
Leasing has traditionally been the costlier option overall, as it encourages perpetual car payments. But for EV owners who prefer a new vehicle every few years regardless, and/or who want the latest range, infotainment options, and battery tech, there may be a unique window in the next few years where it will be more difficult than ever for automakers to accurately predict where EV used vehicle values are going.
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