Under the Hood: Subscription programs may worsen consumers’ auto finance health

Subscription services are making a comeback — especially for electric vehicles — but the fundamentals of this type of financing may stymie consumers’ future vehicle purchasing power in an already difficult market. Broadly, subscription services provide consumers use of a vehicle for an all-inclusive monthly fee that covers insurance, roadside assistance and maintenance. Some programs limit mileage or require minimum terms, and some allow consumers to swap vehicles. Hyundai , for one, rolled out an EV subscription service in February. Evolve+, as the program is called, is a month-to-month subscription service that includes 1,000 miles, insurance, maintenance, registration and roadside assistance for a single bundled price. One of the biggest differentiators between subscription services and standard loans and leases is the cost. For instance, average purchasers of a 2022 Hyundai Ioniq 5 SE RWD — with a $47,125 MSRP — would pay $850 per month for a six-year loan at 6.2% interest or $609 per month for a three-year lease. The Evolve+ subscription for that vehicle starts at $899, plus a $300 activation fee. Many consumers are already struggling with steep monthly payments. In the final quarter of 2022, a record 15.7% of consumers committed to new-car monthly payments of at least $1,000, compared with 10.5% in the final quarter of 2021 and 6.7% in the final quarter of 2020, according to Edmunds . Even the monthly payment for used vehicles surpassed the $1,000 mark in 5.4% of cases last quarter — also a record — up from 3.9% in the fourth quarter of 2021 and 1.5% in the fourth quarter of 2020. Further, consumers are increasingly being bogged down by negative equity. For new vehicles, 17.4% of sales in the final quarter of 2022 entailed trade-ins with negative equity, up from 14.9% in the prior-year period. And on a dollar basis, the average amount owed on upside-down loans jumped nearly 30% year over year to $5,341, according to Edmunds. Does s ubscription plus loan equal a solution? So, here’s the rub: With a loan, consumers keep the car at the end of the term. They might be shelling out more on a monthly basis than they would for a lease, but at least they’re building equity. Plus, presumably, the car would have at least several years of life left in it, which would give consumers years to save up for their next vehicle purchase. With a lease, the monthly payment is lower because consumers are only paying for the portion of the vehicle they “use.” At the end of the term, consumers may choose to buy their car for the price agreed upon at the start of the lease. Smart consumers would sock away the payment differential between the lease and the loan — $241 per month in the Hyundai Ioniq 5 example above — and use that to pay the residual value at the end of the term to purchase their leased car. Alternatively, those lessees might squirrel away the differential to use toward their next vehicle purchase. In either case, consumers benefit in some way, either through vehicle equity or cost savings. But with subscription services, consumers shell out higher monthly fees without gaining any equity in their vehicle. This one-two punch will likely hamstring them when it comes time to purchase another vehicle, as they would have limited savings and no vehicle to trade in. Perhaps the middle ground would be a subscribe-to-own program. Startup Motor Drive , which last month raised $7 million in a Series A investment from AES and Mitsubishi Corp. , offers a limited version of this type of policy. A portion of consumers’ monthly subscription fee counts toward a down payment for the vehicle. But the down payment only accrues for the first three months of the subscription, so it would likely do little to offset the price of the vehicle. EV subscription company Driveitaway also has a subscribe-to-own program that allots a portion of the consumer’s monthly payment toward the purchase of the car. It’s pretty clear that consumers these days need help saving money, and maybe more subscribe-to-own services would help them do that. Perhaps subscription companies should bump up their pricing by $150 or $200 a month, and then escrow those funds for consumers to use as down payments for their vehicle purchases. The escrow offering could go a long way in enticing consumers to opt for the higher priced subscription service while simultaneously protecting them from being locked out of a vehicle purchase in the future. Auto Finance Summit East, Auto Finance News’ new spring event, is set for May 10-12 at the JW Marriott Nashville featuring a fireside chat with Peter Muriungi, CEO of Chase Auto. Visit autofinance.live.

Under the Hood: Subscription programs may worsen consumers’ auto finance health

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