More Bad News Is About to Hit Tesla's Earnings

Only a few years ago, offering leasing options for electric vehicles (EVs) seemed like a no-brainer for the auto industry. Leasing an EV gave consumers a way to mitigate technology risks, such as rapid battery development making a not-so-old vehicle far less efficient, and lower monthly payments, which are sitting around record highs. Leases even had a loophole that enabled the sale to qualify for the previously active $7,500 federal EV tax credit.

Fast-forward to today, and a wave of those off-lease EVs actually threaten Tesla (NASDAQ: TSLA) earnings. If you're asking how, you've come to the right place. Let's dive in.

Image source: Tesla.

How it all works

Captive finance arms can be big business for automakers, including EV makers such as Tesla, as well as Ford Motor Company's (NYSE: F) Ford Credit. Tesla's in-house financing is often referred to as Tesla Finance, and it enables customers to arrange loans and leases directly through its website. Tesla utilizes its own financing for some loans and leases, and also partners with third-party lenders as well.

Here's the kicker: When an automaker like Tesla creates a lease, it projects the estimated value of the off-lease vehicle, and if that vehicle comes back more valuable, great, but if it comes back less valuable, the finance arm is on the hook, recording a loss. Because leasing EVs seemed like such a no-brainer in recent years, there's a wave of off-lease vehicles coming to flood the market over the next couple of years. The problem is that these vehicles are coming back substantially less valuable than expected.

Declining values erode profit

In fact, industry experts project the value of those off-lease EVs to be roughly $10,000 less than automaker finance arms projected and could range between $5,000 to $20,000 less valuable, depending on the make, model, and initial price tags. Looked at another way, at the end of 2025, a 3-year-old EV at auction maintained about 40% of its original value, per Cox Automotive, which was down significantly from early 2022, when the average 3-year-old EV kept 90% of its value.

Credit agency Experian estimates off-lease EV volume to peak in 2028 with roughly 800,000 EVs hitting the used markets. Using the $10,000 less valuable figure, at the 2028 expected volume, it could cost the industry about $8 billion. Worse yet, as Tesla only sells electric vehicles, it dominates the industry lease volume. In fact, according to Automotive News Research & Data Center, Tesla is estimated to have leased nearly 229,000 EVs last year alone, more than General Motors (NYSE: GM) at roughly 101,000 vehicles and Ford at roughly 52,000 vehicles, combined.

Auto industry investors: Don't panic!

A worthy reminder for investors is that back in 2008, vehicles faced a drastic drop in value, among other factors such as tightening credit and plunging demand. This caused captive finance arms of Ford and GM to take billions in losses. In fact, GM even cut ties with its finance arm for many years after the financial crisis.

While that sets the stage and emphasizes the broader industry problem coming with the wave of off-lease EVs, Tesla investors don't have to press the panic button just yet. Fortunately, Tesla Finance directly manages a small portion of its lease portfolio with third-party lenders, such as Ally Bank, JPMorgan Chase, among others, covering the vast majority of Tesla leases.

Investors need to keep an eye on this development over the next couple of years, but despite the industrywide off-lease pain coming, Tesla won't be on the hook for most of the losses.

JPMorgan Chase is an advertising partner of Motley Fool Money. Ally is an advertising partner of Motley Fool Money. Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends JPMorgan Chase and Tesla. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.