2023 might be the best year to bite the bullet on your first electric car. That’s because the cap on vehicles that are eligible for the $7,500 federal tax credit has been eliminated thanks to the Inflation Reduction Act (IRA). It was previously set at 200,000 vehicles per model, a threshold that left all Teslas and and many GM electric vehicles ineligible.
But while that restriction to the EV tax credit is gone now, another one is on the horizon. Starting in 2024, that same tax credit will only be available for cars whose battery materials are primarily sourced either from the U.S. or from other nations that have trade agreements with the U.S.
Since the vast majority of battery materials currently come from China, Russia and the Democratic Republic of Congo, that may be a tough threshold to meet for most manufacturers. Therefore, completing your EV purchase before the end of 2023 may be the only way to make sure you get that tax credit.
So if 2023 is the year, perhaps you’re asking is it better to buy or lease an electric car. In this article, we’ll walk you through the pros and cons of each option, specifically as they pertain to electric vehicles.
The Difference Between Buying and Leasing
Most people are familiar with the differences between buying and leasing when it comes to traditional gasoline-powered cars. But there are additional nuances to take into consideration when applying those to an electric car.
When you buy, you either pay cash upfront (not usually a good investment) or, more typically, you finance the purchase and pay a monthly finance charge over time. Once you’ve made all the agreed monthly payments, you take full ownership of the vehicle.
When you lease a vehicle you’re essentially renting it for a fixed monthly amount. This amount is typically less than for a purchased car, but you have to give the car back at the end of the lease term, which is typically 2-4 years.
The advantages of leasing any car include being able to afford a better car, not having to come up with such a large down payment and having no maintenance costs to worry about.
Disadvantages include limited mileage allowance, hefty penalties for early termination and the fact that you don’t ever get to own the car.
Pros and Cons of Leasing an Electric Car
When it comes to electric cars specifically, some of the traditional pros and cons that apply to ICE vehicles are worth exploring a little further or perhaps even reconsidering entirely.
Pro: Leasing Means You Can Afford a Better Car
Does it still apply to electric cars? Yes. In fact, given that electric cars are typically quite a bit more expensive than their ICE counterparts, this benefit applies even more to electric cars than to ICE vehicles.
SInce you typically get more “bang for your buck” when you lease, you can load up your EV with features and add-on that might have been out of your budget if you were buying. Leasing could even make the difference between being able to make the switch to EV or not.
Pro: Leasing Means Repairs and Maintenance are Not Your Problem
Does it still apply to electric cars? Not so much. Electric vehicles have way fewer moving parts than ICE ones do and, therefore, tend to break down far less frequently. They also don’t need oil changes.
Moreover, upgrades and fixes are usually handled with software updates that are sent directly to the car over the air. The peace of mind that comes with knowing that your leased car will be fixed by someone else if it breaks down is less of a benefit if it hardly ever breaks down.
Con: Leasing Means You Don’t Ever Get to Own the Car
Does it still apply to electric cars? No. Electric cars are still in that stage of development where later models are considerably better than earlier ones. Having the ability to effortlessly exchange your old one in three years is a much bigger benefit when it comes to electric cars.
Nowhere is this more apparent than over the issue of range. An EV that has 200 miles of range today will lose value dramatically if next year’s model comes out offering 300 miles. Such dramatic improvements in performance year-on-year are rare in ICE vehicles.
At least for the next several years, being able to trade your electric car in (maybe even before the lease is up) will be far more attractive for EV drivers than it has traditionally been in the ICE car market.
Pros and Cons of Buying an Electric Car
Pro: You Can Drive as Many Miles as You Like
Does it still apply to electric cars? Yes (but). Miles are miles and any arrangement that removes a mileage restriction is good if you drive a lot. However, we don’t really know yet if we’re going to drive as many miles in our EVs as we currently do in our ICE vehicles.
Long road trips in our own cars might not happen so often in the all electric future. Even if our concerns about charging infrastructure are resolved, we may choose to rent either a longer range EV or even a gas powered car when we’re planning a trip to grandma’s house out of state.
And many two-car families may opt for one electric car, while keeping their second as an ICE vehicle, just for such occasions. In those scenarios, leasing a car which has a 12,000 miles per year restriction might not be as much of an issue for electric cars as it currently is for ICE vehicles.
Pro: You Eventually Get to Own the Car
Does it still apply to electric cars? Maybe not. Most car financing terms are 60 months (or five years). Given how quickly EV technology is evolving, owning a five-year-old electric car once you’ve finally made that last payment may not be as beneficial as it would be for an ICE vehicle.
What’s more, a legacy manufacturer that had a great reputation in the ICE world, may by then have proven itself unable to keep up with EVs. My own 10-year love affair with the Volkswagen brand quickly hit a rough patch when I started to seriously consider buying one of their electric vehicles.
Con: Your Monthly Payment Will be Higher When You Buy
Does it still apply to electric cars? Yes. Even more so. Electric cars are already roughly $10,000 more expensive than their gas-powered equivalents. That price differential inevitably leads to higher monthly payments.
Add in the fact that buying is generally more expensive than leasing, particularly at a time of high interest rates, and you may have an electric car that is simply not affordable unless you lease. I was recently quoted a monthly payment for an EV that was roughly double what I currently pay for a similar gas-powered car.
Yes, there are tax incentives available through the Inflation Reduction Act but they only apply to cars that have a sticker price of less than $55,000 ($80,000 for SUVs and pick-up trucks). Once you start adding features that many of us consider standard in the ICE world, it might be hard to find the electric car you want within that price range.
Verdict: Lease of Buy?
Although the decision to lease or buy your electric car ultimately depends on your own circumstances, at this time, it looks like leasing is the smarter choice for most people. This may change over time as the electric car market matures, the cars get cheaper and the used EV market starts to gather steam.
What is not debatable is that a revolution is upon us and, if you’re looking to experience the newest electric car models on the market, leasing is a great solution that can help make it more affordable. Plus, it gives you the chance to switch up your ride every few years.