Auto Finance in the Electric Vehicle Transition

Abstract

Financing cost differentials tilt the calculus for households toward electric vehicles (EVs). Using 85 million observations on U.S. auto loans, we study households' credit risk by engine type, seek to uncover the sources and ask if credit risk differentials are being priced. We find that EV borrowers default 29% less relative to internal combustion engine vehicle (ICEV) borrowers with a back-of-the-envelope value of $1,457 in lender savings. To disentangle selection from ex post exposure to differential costs of running an EV, we implement a differential shock exposure by treatment model of Borusyak and Hull (2023). We find that a prolonged higher gasoline price regime could result in ICEV borrowers defaulting up to a 83% increase. Do lenders pass along these savings to borrowers? EV borrowers pay 2.2 percentage point lower interest rate, the equivalent of $2,711 in foregone payments. This lower rate is only for captive (manufacturer-based) lenders, not for bank and nonbank lenders, suggestive of policy and strategic motives by manufacturers, not a passing along of credit risk value. Another $1,457 is probably not being priced to households. Finally, we find that the ABS market knows, at least partially, allowing for less in loan loss reserves buffering the ABS, reflecting $233 in savings for the ABS issuer.

Keywords: Auto loans, EVs, electric vehicles, ABS, car finance, vehicle lending, gasoline price effect on default

JEL Classification: G21,G23,D12,R40,Q55,E22,Q31