How can EV depreciation affect your loan?

Depreciation is something that affects nearly every vehicle. It’s often said that vehicles drop in value the minute you drive them off a dealer’s lot. Electric vehicles (EVs) are no exception. When you own an EV, and when you have finance on it, depreciation can affect your resale value, your ability to trade it in eventually, and your overall lending picture.

But understanding how depreciation works can help you make informed borrowing and purchasing decisions, so you can navigate the process without a problem.

What is EV depreciation?

EV depreciation refers to the reduction in a vehicle’s value over time. This happens because of a range of factors, including the age of a vehicle, its mileage, general wear and tear and market demand. Consumer NZ says new cars experience the fastest rate of depreciation, and it’s usually something that happens to the greatest extent in the earlier years of ownership.

Another factor that comes into play for EVs is the technology in the cars. If there is a big leap forward in EV technology, it can cause a jump in depreciation in older models. There can be different rates of depreciation between different types of EV and across manufacturers, according to market demand and technological improvements.

Understanding how it works, and how it might affect any vehicle you’re considering, can help you work out

what your EV might be worth in the future.

Why does depreciation matter when you’re financing an EV?

You might think depreciation doesn’t really matter that much. If you bought the vehicle you wanted, and you’re enjoying owning it, a drop in value might not be a huge concern. That’s a valid perspective, but depreciation can be a bit more of an issue if you’ve borrowed money to buy your vehicle.

Your loan repayments reduce what you owe over a period of time, and depreciation reduces what the EV is worth. In the early years of ownership, you may find your vehicle depreciates more quickly than you reduce your loan balance, so you end up owing more than the car is now worth. That’s not necessarily an issue if you don’t plan to sell, but it can be something to think about if you know you’re going to want to sell your vehicle or upgrade before the loan term ends.

Understanding negative equity

That situation of owing more than your vehicle is worth is referred to as negative equity. If you’re in negative equity and thinking about selling your EV or upgrading to a new one, you’ll need to think about how you’ll tackle it. There are options, including potentially contributing some money to pay off the extra, or rolling it into a new loan if you’re moving to a new vehicle.

If you know it’s likely that you might want to sell your vehicle or upgrade before the end of the loan term, you may be able to reduce the chance of being in negative equity by opting for a loan structure that works with your plans. Maybe you pay more of a deposit to reduce the amount you’ll need to borrow, or you opt for a shorter loan term to pay down your loan more quickly. We can help you look at what might suit.

Factors that can influence EV depreciation

EVs don’t all depreciate at the same rate. There are a few things that can make a difference to how fast your vehicle might lose value.

Battery health and warranty coverage 

Battery condition is a big factor in how much an EV is likely to be worth if it’s sold. The better your battery condition, the more likely your vehicle is to retain its value. If you have any remaining warranty on the battery, that can also help improve buyer confidence and support the vehicle’s value. If you’re considering buying a used EV, it may help to look at battery health reports to understand how the vehicle is likely to fare over the coming years.

Advances in EV technology 

When new models have significant improvements in driving range, charging speed or battery performance, it may reduce demand for older models that do not have these features. Vehicles with outdated technology may experience faster depreciation as new models enter the market. This depreciation can often happen in steps as new advances come to market.

Brand reputation and market demand

How sought after is the brand of your vehicle? Popular EV brands and models often attract stronger demand in the used vehicle market, particularly if they develop a reputation for being reliable. Consumer confidence in a particular type of EV, and ongoing manufacturer support, can help with value.

Vehicle age and mileage 

As with any vehicle, older models with higher mileage are usually worth less than newer vehicles that haven’t travelled as far. But overall condition and maintenance history can also help value, so it might help to keep good records of the care you’ve taken of your vehicle.

How can loan structure influence depreciation risk?

If you’re worried about depreciation, there are a few things you could do to help reduce your chance of ending up in negative equity.

Deposit size 

If you have a larger deposit, you may need to borrow less to buy your vehicle. You’ll also generally have more equity in the vehicle sooner, which gives you a buffer against depreciation. A lower loan balance usually reduces the likelihood that you’ll end up owing more than your vehicle is worth.

Loan term

When you have a longer loan term, your balance will generally reduce more slowly. This may mean your vehicle depreciates more quickly. If you think you’ll only own your vehicle for a short time, you might choose a loan term that matches that, to ensure you’ve paid it off before you want to sell, provided you can comfortably meet the loan repayments for the shorter term.

Additional costs added to the loan 

If you’ve added other costs to your loan, such as warranties, accessories or insurances, you may start off owing more than the car is worth. This can increase your exposure to depreciation, unless you pay your loan down relatively quickly.

How can EV depreciation affect future vehicle decisions?

Depreciation doesn’t have to stand in the way of your plans, but understanding how you might tackle it can be beneficial.

If you sell your EV before the loan is repaid, you may find that the sale proceeds do not cover the full amount still owing on the vehicle. This is usually only the case in scenarios where there has been significant depreciation. If you can get a good understanding of the likely resale value of your vehicle, it may help you plan ahead.

When you trade in your vehicle for a newer one, the value of your existing vehicle influences what you need to pay for the upgrade. If the value has fallen significantly, you may need to put more money into the purchase, or borrow more for your new vehicle to clear what’s owing and pay for the step up.

Depreciation can also be a consideration if you want to refinance. The vehicle value is often considered by lenders assessing a refinance application. If the value has fallen a lot, a lender may be wary.

Ways to reduce depreciation risk when financing an EV

You may be able to reduce the risk of depreciation in a few ways.

Research

You may be able to identify EV models that have a history of strong resale values and established market demand. This could give you some comfort that the vehicle you’re considering is likely to hold its value to a greater extent.

Deposit

If you can pay a larger deposit, it’ll reduce what you have to borrow. This means you’re less likely to owe more than the car is worth at any point in your loan term.

Loan term 

Aligning your loan term with the length of time you expect to own the vehicle can help avoid situations where you’re left with a loan on a vehicle you want to sell.

Battery health

If you can help your vehicle maintain its battery health, it may mean it retains its value to a greater extent. This usually means caring for your vehicle according to manufacturer recommendations.

Warranty

Does your vehicle have battery warranty coverage? Understanding the cover you have when you buy your vehicle, and how long it lasts, may help you to gauge the likely future value.

Finance 

It’s always sensible to compare your options carefully and consider the total cost of borrowing. We can help you find a solution that suits your circumstances.

Conclusion

Depreciation is an important thing to think about when you’re considering getting finance for an EV. Understanding how your vehicle’s value may change over time will help you avoid potential financial challenges in the future. We’re here to help you consider what loan structure and strategy is likely to support your vehicle’s long-term affordability, while giving you the flexibility you need.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.