All those hefty incentives that have made leasing a centerpiece of the EV sales strategy may create some complications for the used-vehicle market during the next two years. According to recent J.D. Power data, a glut of used EVs will be coming off lease throughout 2026 and beyond, while, at the same time, there is likely to be a significant slow-down in returning lease volumes for gas-powered vehicles.
That lopsided dynamic in supply, combined with changes in EV pricing, uncertainty about the future of tax credits and incentives and concerns about long-term battery health will create some new complexities for consumers.
Wave of Used EVs Coming
Due in large part to a provision in the federal Clean Vehicle Tax Credit, which allows auto dealers to pass along a $7,500 tax credit to all EV lessees, nearly half (46%) of all franchise EV sales and 21% of total EV sales -- including Tesla -- in 2023 were leases. That trend continued throughout the first nine months of 2024, with the lease share of total franchise and Tesla EV volume reaching 30%.
Meanwhile, lease volumes for gas-powered vehicles have been lower than pre-pandemic levels. Industry-wide, just 2.4 million gas-powered vehicles were leased in 2023. While that represents a 17% increase from 2022, it is still considerably lower than the pre-pandemic average of more than 3 million leases annually, which will likely create a shortage in used-vehicle availability in 2025 and 2026.
As a result, returning EV lease volumes are projected to decrease 2% in 2025 before surging 230% in 2026, when a total of 215,000 EVs will come off lease.
Meanwhile, overall returning lease volumes, including both gas-powered vehicles and EVs, have been on a sharp decline, falling 37% since 2020. That trend is expected to continue through 2025 when roughly 2 million total vehicles will come off lease, down from 4 million in 2020. That means that, by 2026, the total share of EVs in the returning lease mix will be 5.3%, up from just 1.6% today.
Cycle of New EV Leasing Likely to Continue
Another trend influencing the dynamics of the used EV market is the steady decrease in EV prices during the past two years.
For example, in the compact SUV segment, the average transaction price for a new vehicle is currently $35,900, down $12,700 from $48,500 in 2022. Driven by a combination of increased sales incentives and increased supply of new models, the steady decline in EV prices has created a scenario where lease buyouts, which had been a popular option for the past few years during supply constraints, no longer make economic sense.
The average returning lessee in the compact SUV segment is paying $583 per month for their vehicle, and the average residual value of their vehicle is $29,645. Importantly, that means the buyout price of the majority of compact SUV EVs is higher than the $25,000 threshold that would qualify for the used EV tax credit. Accordingly, it would cost the average returning lessee in the compact SUV EV segment $477 per month to buyout the lease. Meanwhile, the average lease payment on new vehicles in the same category is just $457 per month.
Add to these stats the facts that it would be significantly more expensive to lease or buy a comparable gas-powered vehicle, and that 94% of current EV owners say they are likely to consider an EV for their next vehicle purchase or lease, and it becomes clear that -- under current cost and incentive structures -- returning EV lessees are likely to lease new EVs.
Uncertainty Abounds
Of course, all these projections assume that current federal tax incentives and manufacturer incentives on EVs continue to be offered at the same rates, neither of which is a certainty. The results of the U.S. presidential election, consumer demand for new EV models, and continued improvements in EV range will all weigh heavily on the future dynamics of the used vehicle marketplace.
Long term battery health will also be a factor in this equation. With federal regulations requiring minimum EV battery warranties covering owners for eight years or 100,000 miles, this potentially costly maintenance item will start to become a much bigger factor in the consumer calculus of used vs. new vehicle purchases.
Together, this new mix of variables, which has not previously affected used-vehicle valuations, will now become a big part of the consumer value equation. With 279,300 EVs set to come off lease in the next two years, the results will tell a lot about the future of the used-vehicle marketplace.
