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The electrifying rise of the electric vehicle (EV) market is gradually reshaping the global automotive terrain. As the adoption of EVs enters the mainstream, the clamor for specialized financing solutions intensifies – auto lenders need to take note.
The global EV market is experiencing seismic shifts that have left analysts scratching their heads. While battery electric vehicle (BEV) sales were robust in 2024, the momentum appears to have hit a speed bump. According to GlobalData*, global BEV sales reached an impressive 11.12 million units last year, marking a 14% year-over-year (YoY) increase. However, this growth is a distinct slowdown from the remarkable 30% YoY surge seen in 2023.
Regional disparities highlight varying levels of EV adoption. GlobalData* figures point to anemic BEV growth of just 0.9% in Europe in 2024, with Germany actually experiencing a severe 27% decline due to the withdrawal of certain government incentives. Meanwhile, the UK emerged as the largest BEV market in the region. China remains a dominant force, with BEV sales rising by 19% to 6.2 million units, driven by strong demand for plug-in hybrid electric vehicles (PHEVs) and extended-range electric vehicles (EREVs).
Zooming in on the United States, BEV sales grew by 8.7% - but this represented a sharp decline from the 58% YoY growth seen in 2023, largely due to vehicle costs. Q3 2024, the period for which data is most recently available, saw EV ownership hit a market share of 8.9% and 346,309 EVs sold, marking a 5% increase from Q2 and an 11% year-over-year gain. Challenges remain, including high EV prices (the average transaction price exceeds $57,000, a 19% premium over the industry average), limited charging infrastructure (as of the middle of 2024, only 8 federally funded chargers had been built out of a planned 500,000) and supply chain constraints tied to foreign dependencies. Incentives played a crucial role in boosting sales, with discounts averaging over 12% of the transaction price and leasing loopholes allowing buyers to tap into government-supported benefits. Tesla maintained its dominance with a 6.6% sales increase, driven by the Cybertruck’s debut (16,000 units sold), while GM surged 60% to 32,095 sales, overtaking Hyundai, as the US EV market moves towards a 10% total share in the near future.
Looking ahead, GlobalData* projects that BEV sales are projected to rise to 13.7 million units in 2025, representing a 23% YoY increase. Key factors influencing future growth include regulatory policies, battery price reductions and hopes around increased affordability of new EV models. In China, government incentives and tax exemptions are expected to further boost EV adoption. Similarly tempting new incentives have been mooted in the UK, while regulatory requirements around CO2 are nudging European automakers towards developing newer, more efficient BEV models that also promise greater up-front affordability.
The EV Financing Predicament
According to Experian**, more consumers are choosing to lease their EVs instead of purchasing. Leasing continues to increase in the electric vehicle (EV) market. EVs accounted for nearly 20% of all new vehicle leases in Q4 2024, up from only 2.11% of new vehicle leases four years ago in Q4 2020. Diving a bit deeper, data found EVs accounted for 9.3% of all new purchases in Q4 2024. Of those EVs, 50.1% were leased, while 38.9% were financed through loans.
With lease payments for EVs ultimately being more affordable compared to loans and the excitement of driving the latest models, the biggest reason EV leases are growing in popularity, as well as being increasingly offered by the lenders - is that it is hard to determine the value of the car in 36 or 48 months. So, consumers pass the risk on to the leasing company.
This leaves lenders with a hard dilemma: to lease or not to lease, to loan or not to loan, and if so, how to ensure profitability? Guessing the future value of the car is not easy with an EV.
EV Financing Considerations for Lenders
As EVs become more mainstream, financing options will need to adapt. To date, EV financing largely follows the same principles as traditional car financing, with loaning and leasing options among the most popular. But there are additional considerations in the EV market influencing price dynamics. These include battery depreciation, charging infrastructure investments and insurance premiums. Taken together, they point to the need for more sophisticated solutions from auto lenders.
Recent research found that new EV financing grew by over 30% YoY in 2024. Nearly 45% of all new EV transactions were leases, compared to just under a quarter in the previous year. Lower monthly payments and reduced risks from depreciating value have made leasing EVs a particularly attractive option for many consumers.
Used EV financing options are also on the rise; financing on used EVs rose among both prime and super-prime borrowers in Q3 of 2024. But this creates other considerations associated with the wear-and-tear of older models; some entry-level used EVs do not include batteries in the purchase price, for example, requiring financers to make separate battery leasing agreements.
There are several considerations for EV lenders looking to offer competitive options. The most obvious is how to best determine the loan/lease rate and terms for EVs? Many lenders perceive higher risk in rapid EV technology advancements; the possibility of faster depreciation and lower resale values makes them more cautious.
Additionally, evolving regulations around PHEVs and their CO2 ratings in Europe may impact EV financing attractiveness in the coming years. How can lenders prepare themselves for market shifts and the potential increase in demand?
Adapting to the Future of EV Financing with AI-Based Pricing Analytics
With the rapid evolution of the EV market, financial institutions must adopt agile, data-driven strategies to stay competitive. Quarterly campaigns and special promotions can be optimized for better profitability. AI-based pricing analytics platforms can play a crucial role not only in driving the profit margins of EV financing but also in shaping the profitability of the auto lending portfolios overall.
A huge part of EV financing is about managing risk. This includes not only credit risk but also risk associated with diminishing resale values, supporting technology infrastructure, and charging stations’ availability. Managing loan risk through price optimization is one of the key advantages offered by ML-powered analytical platforms.
Platforms like Earnix offer dynamic pricing, advanced analytics and digital decision-making solutions to financial institutions. These tools help institutions navigate and succeed in the evolving market for financing EVs, often enabling them to capture new market segments and outcompete rivals.
Advanced Pricing Analytics and EV Financing Use Cases
Use Case #1 – Drive EV Loan/Lease Volume. For example, a pricing analytics solution can help a lender influence demand and loan bookings across targeted consumer segments or for a specific vehicle model, while keeping profitability in check.
Use Case #2 – Drive EV Loan / Lease Profitability. For lenders aiming to optimize their auto lending portfolio to include more EV loans, a pricing analytics solution can provide valuable insights. By understanding the types of loans to book and the volume of each loan type, lenders can shape their portfolio to achieve desired profitability goals. This ensures that the portfolio is balanced and aligned with the lender's strategic objectives.
Use Case #3 – Manage EV Loan/Lease Risk and Decrease Delinquencies. When it comes to managing risk, joint simulation capabilities are crucial. These tools help lenders forecast the impact of decisioning logic changes before implementation, allowing for better risk management. EV lending can be optimized for various key performance indicators (KPIs), including risk, profitability, volume, or a combination thereof. This ensures that the lending strategy is robust and resilient, reducing the likelihood of delinquencies and enhancing overall portfolio health.
To learn more about how new AI-driven platforms are helping accelerate operational efficiency and drive loan profitability for car finance, and how to take advantage of this technology, please reach out to Earnix to learn more.
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** Experian State of the Automotive Finance Market Report: Q4 2024