Auto Finance in the Electric Vehicle Transition

Department: Finance

Speaker: Adair Morse (Berkeley)

Room: T017

Abstract

Financing cost differentials tilt the calculus for households toward electric vehicles (EVs), a Previously unrecognized transition role. Using 85 million observations on U.S. auto loans, we study household’s auto loan interest rates and defaults. We present four findings. First, EV owners default 30 percent less relative to internal combustion engine vehicles (ICEVs). This is partly attributable to insulation from gasoline price shocks: a one standard deviation increase in gas prices results in 1 percentage point lower default rate for EVs relative to ICEVs. Back-of-the-envelope calculations suggest such default is worth $980 in savings if priced to households. Second, loans for EVs carry a 2.2 percentage point lower interest rate, the equivalent of $1,974 in savings on a $34,000 vehicle. Third, this lower rate is only for captive (manufacturer-based) lenders, not for bank and nonbank lenders. Manufacturers hence may be passing on $1,974 of operating profits to consumers for policy and innovation reasons, while the lower credit risk of EV borrower (another $980) is probably not being priced to households. Finally, the lower credit risk is also not passed in economic magnitude to investors in the ABS market. Our findings argue for emphasizing finance in the EV calculus and separating ABS markets.