Leasing vs. Buying Electric and Hybrid Cars in 2018
Investing in the vehicle you plan to drive for the next few years — or even the next decade — can be preceded by a long and difficult process of weighing the pros and cons of the myriad options on the market today. Not only do you need to choose a make and a model, but also the appropriate payment option to match your finances. When it comes to electric and hybrid vehicles in particular, many people are left scratching their heads as to whether to purchase or a lease these new modern vehicles. Luckily, the decision is easier than you think.
Electric vs. Hybrid Vehicles
Before we get into the price tags for leasing or buying electric and hybrid cars, let’s review their most important differences. This will help in understanding their respective advantages, especially when it comes to investing one of your own.
To power a hybrid vehicle, such as a Chevy Volt or a Toyota Prius, a mix of electricity stored in batteries and gas from the tank will propel the car forward. Different from fully electric cars, which run only on electricity, hybrid cars are usually powered primarily by gasoline, while the battery and the motor are implemented to increase the car’s overall efficiency. On a whole, hybrid cars take advantage of the benefits of both gas and electric powers while minimizing their respective limitations.
Electric cars, as mentioned, are 100 percent powered by electricity, and free you from ever stopping at a gas station again. Nonetheless, they will need charging of some sort, which can be done in the comfort of your own home with an installed EV charger, or at several thousand charging station locations across the United States. So, whether you charge your car’s electric battery in your garage while you’re sleeping, or on-the-go, you’ll never need to look at another gas bill.
In terms of performance, electric motors usually outperform standard ones when it comes to acceleration, and they are able to operate at top speed in a fraction of the time required by their traditional counterparts. However, this advantage comes at a price, or more accurately said, a weight. Unlike the small-sized batteries in hybrid cars, used to compliment a gas-powered engine, the batteries used to power an entire vehicle are usually bulky and weigh a considerable amount. This makes it even harder to propel the car forward (except the very sleek, lightweight lithium-ion batteries, which are neither bulky nor heavy, hence their high price tags as seen with Teslas).
Additionally, while hybrid cars charge their own batteries while running on their gasoline engines, fully electric-run vehicles offer a limited mileage range before requiring a hook-up to an external power source. Most EVs average a distance of between 100–200 miles — depending on the size of the battery– while the priciest and newest electric vehicles can go just over 300 miles per charge. A purely gasoline-run car can usually travel about 300–450 miles before needing to refill the tank.
Purchasing vs. Leasing
Now that we’ve got the nuts and bolts of these clean vehicles down, let’s compare their purchasing and leasing values. The first thing to note is market trends; According to Bloomberg New Energy Finance, nearly 80 percent of all battery electric vehicles and 55 percent of all plug-in hybrids are leased, not purchased. That compares to the national lease rate of all vehicles which sits at about 30 percent. However, these lease figures on EVs don’t include Teslas, given that the popular electric car brand does not sell through dealerships other than its own. Nevertheless Tesla does offer leasing of its vehicles in 40 out of 50 states, which means if anything, the total lease numbers of EVs would be higher.
Why is leasing so highly preferred above purchasing when it comes to electric cars? It’s for the same reason that this class of cars is compared to smart phones — the continual advancement of technology. After just a few turns around the sun, everything created with the use of modern day technology becomes second best to whatever has just been released on the market. Leasing a car offers you the best of both worlds — you get to enjoy the newest of the new, and trade it in sooner for an improved version with minimum hassle. The reason this is more prominent in the electric and hybrid market versus the traditional car market is that the creation of EVs is still in its nascent phase. As more battery-powered cars are being demanded by consumers, their production price is dwindling, given that manufacturers can now produce at economies of scale. This is the big reason behind why EVs are now true competitors of conventional cars — they production prices are nearly on par with the rest of the market. Federal and state tax credits have helped to bring them to this point, but more about that later.
According to Black Book, an auto analytics company, an EV sold in 2014 is worth less than one-quarter of its original sticker price, 23 percent to be exact. A 2014 conventional combustion engine’s decrease in value would compare at about a 41 percent drop. This phenomenon of constant updates in battery powered cars makes leasing a sure winner in almost all cases, for both hybrids and electric vehicles.
Why Leasing Takes the Cake
Any car enthusiast knows that the value of a newly purchased car will be halved as soon as you drive any car off the dealer’s lot. This is even truer for most electric cars, which can easily depreciate 50 percent within the first year of ownership. Thus, leasing is a great way to try a new car without buying it outright. What’s more, the most expensive replacement part for any EV and most hybrids is its battery. But on a lease of just a few years, the chances are very low that you will run into any out-of-warranty issues.
Leasing periods vary depending on the dealership and the vehicle, but the majority last from 24 to 36 months, after which point there is an option to purchase your car outright. Let’s take a look at a breakdown of costs for buying versus leasing then purchasing outright a on a Ford Focus Electric in 2018:
The manufacturer’s suggested retail price is $31,735.00:
Purchase Lease
Negotiated Price $28,509.23 $28,509.23
Tax on purchase 2,209.44
Federal Tax Credit 7,500.00
Total Purchase $23,218.67
Lease Only Payment 193.04
Lease tax 14.96
Total Monthly Lease 208.00
Lease payments (3-Year Total) 7,488.00
Down Payment 2,500.00
Lease 3-Year Total $9,988.00
Lease Buyout (Residual incl. fee) 9,068.45
Lease Residual Tax 664.05
Grand Total $23,218.67 $19,720.50
This table was calculated by John Voelcker, Senior Editor at Green Car Reports. The first thing to consider is that John is a seasoned EV purchaser, and secondly, his report is based off of several contacts to more than a dozen dealerships near his California residence. Additionally, the table does not calculate any loan interest paid, so prices are calculated based on full cash payments.
His main takeaway was that it’s fully possible to buy your leased car after its leasing period, and still make out with more money than if you had bought it outright. This all depends on the price of the residual, in other words the remaining balance the dealership will ask you for after your lease period sees its end. This price is also dynamic, and will depend on how the car shapes up against its competitors a few years down the line. Like was mentioned earlier, the market is ever changing, so it’s hard to pinpoint down a residual price upon starting a lease of an EV.
Checking True Prices
Another important thing to note if you are thinking about leasing is doing your homework on the price advertised, versus what you will end up paying when you finally call it yours (for 3 years at least). It’s important to ask your dealer about an “out-the-door” price for leasing the vehicle, which will include the commonly unadvertised taxes, registration, and fees –those that aren’t included in the sticker price.
While there may be hidden fees to uncover, car dealerships are constantly offering plenty of economical leasing deals, which include either a low monthly payment or a low up-front cost. Watch the deals of your preferred car model at a few local dealerships for several months (if you are patient enough) until an ideal offer comes along.
The Famous Federal Tax Credit
One of the greatest financial advantages to a plug-in hybrid car or a fully electric vehicle is its qualification for a federal tax credit of up to $7,500, as well as state-level tax credits available in a host of states across the US. This unique monetary perk is also, however, a downfall when it comes to the consideration of leasing one of these cars. Why? Simply put, a tax credit is awarded to the owner of a car (leaser), not a leasee, someone who is “renting” the car from the owner for an extended period of time. Any credit that is available will go to the top name on the title. However, depending on the dealer, some may pass part of the savings on to you.
The federal tax credit is only available in the year that the car is purchased, which means you could not collect on it later, after leasing for a few years and then buying the car outright. Additionally, if you decide to buy your electric vehicle and plan to cash in on the federal tax credit, be sure that you are going to owe as least as much tax as you will be credited back for your EV purchase, i.e., if your electric vehicle model is eligible for the full $7,500 credit, you must owe at least $7,500 in taxes to be able to collect on all of it. It is, after all, a credit. No remaining amount is carried over into future years.
The good news is, there are other gadgets that you’ll need to power your EV that are eligible for credits, such as an electric vehicle home charger. These can be awarded as much 30 percent of its cost as a credit towards your federal taxes. In addition, several state governments also offer similar credits or rebates that you can take advantage of.
One last thing to remember when it comes to claiming advantageous tax credits on EVs is that there is a limit to them. Tax credits from the US Government for plug-in hybrid electric vehicles and fully electric vehicles stop when each automaker has sold 200,000 eligible electric or plug-in vehicles in the US market. So far, no single car manufacturer has hit these numbers, but as the vehicle trend continues to veer towards electric, your safest bet on claiming any tax credit would be to purchase a car outright. To find out what incentives are available for you, Plug In America offers an easy to use map at State & Federal Incentives — Plug In America.
If you choose to buy your vehicle instead and you are banking on the $7,500 credit, remember that this is a maximum amount, dependent on the size of your battery. As an example, you can get the full credit back on the 2017 Chevrolet Volt, but less than $5,000 will be credited to you if you go for the 2016 Hyundai Sonata Plug-in Hybrid. You can find the full list at the U.S. Department of Energy’s FuelEconomy.gov website.
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