While there are numerous reports regarding the promotional government policies for mass EV adoption, the financial institutions are not exactly on the same page due to some specific reasons.
If you ever went to a financial institution to apply for EV loans, you would know that the interest rates are generally high. In fact, they are not just higher than the on ICE cars, but the repayment tenures are also shorter. An intriguing report published in SSRN dives deep into the specifics on how the terms and conditions of EV loans compare to the loans for regular cars. This study analysed the data of 15 million car loans in 11 European countries between January 2010 and August 2021. The findings are surprising, to say the least!
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High Interest Rates On EV Loans
This report is co-authored by Jan Bena (University of British Columbia), Bo Bian (University of British Columbia) and Huan Tang (University of Pennsylvania) and titled “Financing the Global Shift to Electric Mobility“. The financing patterns that are present in this report are valid for Europe but the authors found the same trends in the USA as well.
The crux of the findings was that, “compared to non-electric models in the same car family, EVs are financed with higher interest rates, lower loan-to-value ratios and shorter loan durations. That “financing gap” occurs because lenders price in the risks they perceive in obsolescence caused by rapid advances in EV technology.” The chief reasons for this are:
- Rapid EV Innovation – Tang mentions that the transition from fossil fuels to electrification has been brisk. Moreover, the transition is still in its infancy. She said, “However, during this transition period, the battery technology associated with EV innovation has not matured yet, which means the current generation of battery may become obsolete very quickly, maybe in one or two years.” She adds, “Existing batteries have insufficient capacity and charge slowly, leading to unprecedented amounts of public and private funding being allocated to advancing battery technology research and development.”
- Low Resale Value – The other prominent factor for high interest rates is the residual value of EVs after the first owner is done with it. Since the EV technology is evolving so rapidly, a used car might well bear obsolete technology after just 5 years. On this matter, Tang confirms, “There’s also a lot of uncertainty in how much lower that market value could be, because we don’t know when the next generation of better technology will be born and commercialized. So, to price in that risk or to cope with that risk, lenders charge a higher interest rate. They are passing through that risk to the household.”
- High Interest Rates, Low Loan-to-Value Ratio (LTV) and Shorter Maturity Loans – In comparison to a non-EV car of the same family, it was found that the interest rates were 0.29 percentage points higher, the LTV ratio was 4.7 percentage points lower and the maturity durations were 2.5-month shorter for electric cars. That puts financial burden on the EV owners from all sides.
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Learn Electric Cars Says
The findings of this thoroughly extensive report are quite surprising. It helps us perceive different challenges to mass EV adoption than the ones we are often used to hearing. Interestingly, not much is being discussed about the financing side of adopting EVs apart from the initial prices, running costs and the battery costs.
This report brings to light the challenges associated with getting a new EV financed. With more such information coming out, we hope that the governments will look into the economics of owning EVs from this perspective too.
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