Research Suggests Auto Loans Should Account for Vehicle Efficiency

A new report from Atlas Public Policy finds that drivers who buy more fuel-efficient vehicles are less likely to default on their auto loans, yet electric vehicle buyers often pay higher interest rates than buyers of gas-heavy vehicles. Looking at loans while accounting for credit score, income, and other standard factors, the report found that people financing below-average fuel economy vehicles are 16 percent more likely to default than average. Buyers of hybrids and plug-in hybrids are 16 percent less likely to default, and EV buyers are 50 percent less likely to default than the average borrower.

Despite this lower risk, EV buyers consistently get charged higher loan rates than buyers of less efficient vehicles, a gap that grows wider for lower-income borrowers. The report estimates this costs EV buyers an extra $300 to $350 over a typical 72-month loan, compared to average rates, not even counting the lower rates their actual risk level would justify.

For a homeowner also weighing a vehicle purchase alongside home energy upgrades, the practical takeaway is that fuel-efficient and electric vehicles cost less to own and, according to this research, come with lower default risk than lenders currently price in. The report argues that auto lenders, including the financing arms of automakers like Ford Credit, GM Financial, and Toyota Financial Services, could adjust loan terms to reflect this lower risk, which would make efficient vehicles more affordable to finance while also reducing losses for lenders.