Electric cars are cheaper than ever, but there’s a catch

Electric vehicle (EV) prices are plunging, but Americans are still on the fence about ditching their gas guzzlers.

According to data from Cox Automotive, average EV prices have fallen by 9.1% since December and are down a whopping 21.1% since the summer.

As of Feb. 1, the typical EV costs $52,314, narrowing the gap between new gas-powered cars to around $5,000.

Tesla is leading the price war in the EV market as the Elon Musk-led company slashed prices of its EVs by nearly 30% since the summer. In January, a Tesla vehicle was only $800 more expensive than a new gas-powered car. That gap was nearly $18,000 in August.

The price cuts aren’t just limited to new vehicles but used ones as well. From Volkswagen to BMW and Hyundai, used EV prices are down between 10.5% and 29.8% year-over-very-ear, according to AutoTrader.

EV prices are expected to continue falling this year, with dealerships offering “more incentives, more discounting” to move unsold inventory, according to Cox Automotive.

Despite steep discounts across the board, Americans are hesitant about buying their first EV due to elevated financing costs and growing personal debts.

As it turns out, a brand-new Tesla Model 3 isn’t an affordable option for most Americans these days.

EV demand slows

Although EV sales are still growing, production has outpaced actual demand—leading to more vehicles piling up at dealerships. This trend was identified earlier this year by General Motors, which has pivoted sharply into EVs.

“It’s true—the pace of EV growth has slowed, which has created some uncertainty. We will build to demand,” CEO Mary Barra said in an earning call.

Detroit rival Ford also cut EV production, warning that demand was slower than expected. This trend was observed by Tesla CEO Elon Musk, who initiated steep price cuts to boost sales.

Many Americans are finding it harder to justify buying a new car—let alone a new hybrid or EV—with financing rates so high. According to MarketWatch, the average interest rate on a car loan is 9.56%. Experian pegs average APR rates at 7.18% for new cars and 11.93% for used vehicles.

High interest rates mean bigger monthly payments, placing more strain on household budgets. The average monthly car payment for new vehicles has reached a staggering $738, according to NerdWallet.

A recent Fed study warned of serious delinquency spikes among people with auto loans. The researchers said 7.7% of auto loans were delinquent, or at least 30 days past due.

“This signals increased financial stress, especially among younger and lower-income households,” said Wilbert van der Klaauw, an economic research adviser at the New York Fed.

Subprime borrowers, who pay much higher auto loan rates, are especially vulnerable. In the fourth quarter, Fitch Ratings reported that the percentage of subprime borrowers who are at least 60 days past due on their auto payments was 6.11%.

Financing issues aside, Americans also have legitimate concerns about whether EVs are reliable cars—or whether they’re just expensive toys.

EV limitations

Limited range, lack of charging infrastructure, and engineering problems are all reasons why Americans are hesitant about EVs.

“There’s no doubt that the limitations—EV charging and the lack of battery resiliency at low temperatures—are causing consumer anxiety,” said Tim Piechowski, portfolio manager with ACR Alpine Capital Research, which invests heavily in the auto sector.

According to a survey conducted by Pew Research, Americans have low confidence that the country will build up its EV infrastructure to make electric car travel as seamless as their gas-powered rivals.

This has contributed to what researchers call “charging anxiety.”

“Range is one thing that we know a lot of consumers care about,” said Alex Knizek, manager of auto testing and insights at Consumer Reports. “Charging anxiety becomes a prominent thing—a charger might be broken or maybe charging at a lower rate than advertised.”

A Consumer Reports study made damning observations about the existing EV market, finding that about half of current models fall short of their driving ranges as estimated by the Environmental Protection Agency. The researchers also found that EV owners are 80% more likely to report problems than vehicles with internal combustion engines.

That probably explains why a staggering 85% of EV buyers also have at least one gas-powered car, according to Experian. In many cases, an EV is an expensive second option for more affluent households.

“Although EVs are growing in popularity, it’s natural for some consumers to still opt for a secondary vehicle,” said Kirsten Von Busch, a director at Experian. “With fewer charging stations in some states, they may feel more comfortable with a gas-powered vehicle.”