The truth about electric car depreciation (and how leasing helps)

How does depreciation work with electric vehicles (EVs)?

Cars depreciate. That's old news.

The moment you drive a new car off the forecourt, it's losing value. It's a cliché as old as time. But it's the unfortunate and unnerving reality that comes with owning a car.

The speed with which EVs have emerged as a dominating presence on our roads has sparked intrigue and debate among industry experts as to how they will depreciate in relation to their combustion engine competitors.

With a constant flow of EVs hitting the market, there's now so much choice for when you go electric. But there isn't a huge bank of historic data to benchmark the used EV market.

Depreciation is unavoidable, but it's important to understand why it happens, how quickly it occurs and how leasing an electric car can help minimise the financial effect on you all together.

Let's dive in.

What is electric car depreciation?

Electric car depreciation is the decrease in value of an electric car between the point of purchase and the point of sale.

When compared to combustion engine cars, the two share a lot of the same contributing factors that will determine their future values, including: vehicle condition, mileage, interior or exterior damage and service history. The typical things you'd want to know about when buying a car.

While not exclusive to new vehicles, depreciation is most prominently discussed when purchasing a new car.

The moment you sign the papers, the car loses value.

This is more a reflection of the financial market than the quality of the product. The EV is no longer 'new' and inherently becomes less valuable, in the same way a piece of jewellery or a household appliance would.

What contributes to electric car depreciation?

The depreciation of a vehicle's value – EV or not – can be contributed to several factors.

Mileage

A car with higher mileage relative to its age becomes less appealing and with that, less valuable.

Also, the more it's driven, the more wear and tear and components can start to have issues.

Number of owners

Rightly or wrongly, the number of legal owners of a vehicle can affect the perceived value of the car. Which can result in the idea of unreliability if it's higher than average.

Warranty and service history

Cars that remain inside their warranty are more valuable due to the increased protection it offers.

Full records of a car's service history will also increase the car's value. This is because one without a full history increases risks of unreliability.

Supply and demand

As with any product-based industry, if the supply of something is limited, those currently on the market become more desirable and valuable.

There could be increased demand for models from a popular manufacturer, which makes their value higher. If supply outweighs demand, value will decrease.

Interior and exterior condition

Any serious or visible damage to a car will impact its value.

Battery health

EV batteries degrade over time and older vehicles are likely to have lower values due to this. Electric car batteries typically last between 10-20 years, and if the battery is in poor condition, it directly impacts the value of the whole car.

The good news is that batteries can be replaced, but there are factors that can make your battery degrade faster:

• Overcharging
• Extreme temperatures
• Charging immediately after driving without a cool-down period
• Relying solely on rapid chargers

Do electric cars depreciate faster than combustion engine cars?

Industry averages have shown that electric cars hold their value marginally better than combustion engine cars.

According to the AA, the typical combustion engine car that travels 10,000 miles a year will have lost 60% of its value after three years.

A large share of car deprecation, sometimes up to 40%, can occur during the first year before slowing down each following year.

However, according to another source, under the same circumstances, electric cars are expected to lose 50% of their value after three years of ownership.

The slower rate of depreciation can be attributed to a few factors, including the buying habits of consumers, who are becoming increasingly eco-conscious in their purchasing decisions.

The impending 2030 ban on the sale of new petrol and diesel cars also adds long-term value to EVs.

When electric cars were first becoming popular, they struggled more to hold their value due to limited demand and the niche appeal.

The Peugeot iOn and Citroen C-Zero, for example, both fared pretty poorly in terms of residual value because they launched when public interest was low and charging stations were almost non-existent.

Things have definitely changed since then, with over 85,000 electric car charging points now dotted around the UK.

The performance of EVs has also improved dramatically, with better driving ranges per charge and much quicker charging times.

According to the SMMT, the average range of an electric car is 236 miles (WLTP Comb). This is three times the average distance driven in a week.

And with new technology such as BYD’s Super e-Platform, which is claiming to recharge an EV battery to 240 miles of range in just five minutes, charging is becoming just as quick as refilling with petrol or diesel.

Do cars ever appreciate in value?

Cars can appreciate and become more valuable than their initial retail price.

While not a common occurrence, depreciation is not always guaranteed. This is usually reserved for classic cars, luxury models or new releases with limited supply.

Appreciation can be unpredictable, sporadic and it can often be the cars you least expect that boom in value.

The automotive industry has been hugely influenced by the COVID-19 pandemic, which resulted in a limited supply of second-hand vehicles and lengthy manufacturer delays on new cars.

According to a report from AutoTrader, as cited on This Is Money, the average cost of a used vehicle has increased by 30% since March 2020.

Reaching highs of nearly £18,000 in March 2022, average costs of second-hand vehicles rose by over £4,000 as demand outweighed supply.

When analysing historic Tesla Model 3 Long Range prices, AutoTrader’s Road to 2030 report highlights how surges in demand can spike used car prices.

In March 2022, the average price of a used Model 3 LR was £47,980 and this continued to rise throughout the remainder of the year, culminating in prices of £50,955 in May 2022.

It took until November 2022, nearly nine months on, for prices to settle and drop back below that previous March average.

Which electric cars depreciate the slowest?

As with any type of car, electric brands that are particularly sought-after enjoy better value retention in the long run. Some of the best electric cars for retaining value include:

• MG4 EV
• Polestar 2
• Tesla Model Y
• Volkswagen ID. Buzz
• Kia Niro EV
• CUPRA Born
• Jeep Avenger
• Hyundai IONIQ
• Tesla Model 3
• Porsche Taycan

Opting for a more premium brand will definitely help slow down depreciation as they tend to hold their value for longer.

But regardless of any protective measures that you take, an electric car will still depreciate.

How does leasing protect you from depreciation?

When you lease a car, you don't have the option to own the vehicle at the end of the term.

In short, this means you won't be responsible for selling the vehicle. The financial risk is the responsibility of the lease provider, not you.

The amount you pay each month is determined by the vehicle's residual value (RV).

A residual value is a pre-agreed figure that a funder, manufacturer or dealer believes the car will be worth at the end of your lease term or finance agreement.

To determine a vehicle's RV, the funder or lease provider will take into consideration the expected deprecation of the vehicle, historical pricing data and mileage to gauge its future value.

When you lease a car, the RV is agreed before the lease as part of your agreement. This figure determines your monthly payment, as you're only paying for the depreciation that occurs in between.

A higher RV will result in lower monthly payments and the opposite will mean higher monthly payments.

Lease cars are not exempt from deprecation, but as the customer, you are mitigating the financial impact the vehicle can have on you.

Owning the vehicle puts you at risk of having to sell a deprecating asset that has dropped below its RV.

Depending on your lease terms, the total cost of the deal is typically less than the difference between the current market value and the RV, ensuring you're not out of pocket.

The role of uncertain electric car residual values

The RV of an electric car has become a huge talking point within the industry due to the uncertainty that surrounds them.

Predicting accurate RVs for electric cars has presented a new challenge for the automotive industry.

Historically, an RV for a combustion engine vehicle can be calculated using numerous factors including historic pricing data, perceived quality, internal infrastructure and technology among other variables.

However, predicting the future values of a still relatively new entity presents new tests, as Carparison's Head of Pricing and Procurement, Tom Clarke, explains: "There's no one-size-fits-all formula that can be transferred from the combustion world when calculating the residual value of an electric car.

"We're not able to use historic pricing data to gauge future values of electric cars in the same way we can with their petrol or diesel alternatives.

"With the 2030 ban looming, we're also seeing manufacturers develop their vehicles at an unprecedented rate, with electric technology taking huge leaps forward year on year.

The rapid rate of development in the electric market is putting new models at increased risk of becoming outdated much quicker. Throw in the unpredictability of the market and the associated manufacturing costs, you have to re-think the way we calculate the future values of our vehicles in preparation for an electrified industry."

What does the future hold for used electric cars?

Used electric cars are poised to become a prominent figure in the market, with tempting discounted prices incentivising drivers to make the switch.

As we move towards 2030, maximising a cost-effective used market will be critical in the UK government's bid for widespread EV adoption.

Outright purchase costs have become one of the biggest barriers to entry for many people looking to make the switch.

However, the supply of EVs is healthy as new cars are released throughout the year. Those that were leased on a three or four-year deal are now returning to the market as used cars too.

With manufacturers offering battery warranties as long as eight years as standard, this extended protection is something that could prove the true long-term value of EVs.

If electric cars do continue to depreciate at a slower rate than combustion engine cars, used car leasing could become the gateway for the masses to finally get out of their petrol or diesel vehicles.

There are a lot of unknowns that surround the electric car market, some that may only be solved with time.

Leasing remains one of the most cost-effective methods of driving a new electric car and with the emergence of the used EV market, it's a trend we may see continue for some time.