Dave Walters of Orange County, California, stands by his newly rented electric Hyundai Ioniq 5.
Supplied by Dave Walters
Fed up with high gas prices and tempted by federal tax credits, Dave Walters decided he wanted an all-electric Hyundai Ioniq 5 for his next vehicle.
The Orange County, California resident initially thought about purchasing a used model, until he discovered he could lease the vehicle and take advantage of a major loophole under the Inflation Reduction Act.
Buying a used Ioniq, which is produced in South Korea and Indonesia, wouldn’t net him $7,500 off a federal tax credit. Leasing the vehicle would.
“I checked the numbers – what it would be without the lease credit and with the lease credit – and that put me over the top and that was the main reason I went that way,” he said. “It was a few hundred dollars less per month.”
Walters is just the kind of consumer Hyundai engine and other automakers have begun targeting EV leases to take advantage of an IRA loophole that allows vehicles manufactured outside of North America to qualify for the credits. It’s something legislators like US Senator Joe Manchin, DW.V.meant to block the rules.
Under the IRA, leasing is categorized as commercial company and therefore exempt from regulations requiring vehicle and battery components to be made in North America. Most EVs on sale today are not eligible for the full tax credit due to where the vehicles or parts were built.
Senator Joe Manchin, DW.V., talks with fellow lawmakers on the House floor before a joint meeting of Congress at the Capitol in Washington, April 27, 2023.
Elisabeth Frantz | Reuters
But leasing can save drivers thousands, as long as the companies receiving the credits pass the savings on to consumers.
“I’m not surprised the manufacturers are saying they’re going to lease more,” said Charlie Chesbrough, senior economist at Cox Automotive. “The IRA rolling on electric cars and making them eligible for that $7,500 is really a game changer, and that has a huge impact on our monthly payment.”
For a $50,000 EV and a 36-month lease, Chesbrough estimates that the full $7,500 tax credit equates to $222 in monthly savings for a consumer.
Automotive research firm Edmunds reports that about 37% of EVs purchased in April were leased, up from 25% in the first quarter and 13% last year.
“It creates a loophole for automakers to target more affluent customers who are more likely to be able to afford an EV and actually get approved to buy an EV,” says Jessica Caldwell, Edmunds Executive Director of Insights. “It also allows them to level the playing field with competitors who get the full tax credit with the purchase.”
According to Randy Parker, CEO of Hyundai Motor America, the percentage of Hyundai Ioniq 5 vehicles being leased rose from about 2% to start this year to more than 30% in April. As of this month, the company is offering a $499 per month lease for the vehicle — lower than the industry average lease payment of $577, according to Edmunds.
The Kia EV6 on display at the New York Auto Show, April 13, 2022.
Scott Mlynn | CNBC
“We want to keep pushing and emphasizing leasing as much as possible so that we can continue to take advantage of the tax credit and consumers can take advantage of the tax credit,” Parker told CNBC. “Right now the cards are so dealt.”
Kia and Ford also say they will increase the leasing of their EVs to lower prices and increase sales.
Kia expects to increase its EV leasing from less than 15% now to as much as 40% in the coming months, Watson said. Like Hyundai, Kia is offering a $499 lease for its EV6 with an initial down payment of $4,999.
“For the next several years, Kia will have to rely heavily on leasing to pass that $7,500 credit to customers. And that’s what we plan to do,” said Eric Watson, vice president of sales operations at Kia. America.
Prior to the IRA’s demise, Hyundai and Kia, which are owned by the same South Korean parent company, were second in the US in electric vehicle sales behind Tesla. But their sales have since lagged behind those of General engines and Ford, both of which have vehicles that qualify in whole or in part for federal tax credits.
Hyundai and other automakers ineligible for the credits under the IRA opposed the regulations, seeking a longer relaxation period for the new rules or broad exemptions based on their US EV plans.
“It gives us a lifeline. I wouldn’t call it a level playing field,” Watson said of leasing eligible for the $7,500 tax credit.
President Joe Biden stands next to a Ford Mustang Mach-E SUV during a visit to the Detroit Auto Show to highlight America’s electric vehicle production, Sept. 14, 2022.
Kevin Lamarque| Reuters
A Ford spokesman said the company’s credit department is working on a leasing strategy for electric vehicles like the Mustang Mach-E, which is produced in Mexico and currently qualifies for half of federal tax credits on purchase. The company’s electric Ford F-150 Lightning qualifies for the full $7,500.
“We’re going to be leasing electric vehicles and you’ll be hearing more about that from us shortly,” Ford CFO John Lawler said last month.
A spokesman for GM said the company is not changing its EV leasing strategy as all of its vehicles are eligible for the full tax credits. Only about 3% of GM’s EVs are leased, he said.
While lease terms are usually only a few years, automakers have touted EVs to attract new customers to their brands.
“The sooner you get these customers into your brand, especially with the new technology, I think the more likely you are to keep them,” Edmunds’ Caldwell said.
And temporary leasing could be an attractive option for many consumers, such as Walters, who traded in a 2009 Nissan Murano, as EVs remain an emerging industry with changing technologies and a significant number of new entrants.
“I wanted to dip my toe in it a little bit and see if I really like it. It’s only been six weeks, but so far it’s been really good,” Walters said. “I really enjoy driving it and I really enjoy not having to pay for gas.”