Mitigating EV residual losses in car finance and leasing

A recent report from the British Vehicle Rental and Leasing Association (BVRLA) highlighted the challenges of weaker than forecast residual values facing car finance and leasing companies. The finger of blame is firmly pointed at electric vehicles (EVs).

While the market appears to be stabilising, the legacy of earlier overvaluations continues to impact companies today.

Simon Frost, Head of Business Development at Bluestone Credit Management, warned that the issue is acute for deals signed between 2020 and 2022.

“Car finance firms are losing ‘hundreds of millions’ in EV depreciation, according to the BVRLA,” Frost said. “While they are looking for government support in the future, today’s reality is that many are haemorrhaging money as cars financed over the last three years, on PCP and leasing agreements, often fail to meet their forecast end-of-contract value. Add in the cost of transportation and remarketing, and the losses per car escalate.”

Frost cited a recent example of a returned Tesla Model 3 with a guaranteed future value of £25,000, which was later assessed at only £18,000. “At £20,000, they would have bought and financed a car they knew and liked, but the option was not available to them. The net result was a loss of £7000 plus the transport, remarketing and assessment costs.”

The root of the issue, Frost highlights, lies in overly optimistic projections made during the early surge of EV adoption. CAP hpi, a leading vehicle valuation firm, began warning of inflated EV values as early as 2021 and has since adjusted forecasts downward. Although these recalibrations were not enough to prevent further erosion – exacerbated by global economic disruptions – they have helped soften the long-term outlook.

While from a residual value perspective, the outlook is more positive for EVs, the immediate challenge of losses remains. It is something that Simon Frost believes can be mitigated at least in part, concluding: “Today’s residual values can be mitigated to an extent, but lenders often lack the necessary processes and resources to implement what may be only a two or three year window of pain.

“It is an area where automotive collections experts, like Bluestone, with our outbound customer contact expertise, can pivot their model to help lenders proactively contact customers and tailor a new financing solution.”

The industry is also lobbying for government support to ease the burden of the depreciation crisis. However, with no immediate solutions forthcoming from policymakers, the focus remains on operational improvements and customer engagement.