UK ministers plan to subsidise EV loans to drive sales

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UK ministers are drawing up plans to subsidise electric car purchases by guaranteeing consumer loans, as they look at ways to drive up sales that remain stubbornly below official targets.

The government has opened private discussions with the auto finance sector to try to increase the availability of low-interest or interest-free loans to help boost the take-up of EVs, according to government and industry figures.

One option being discussed is for the state to underwrite private sector loans to reduce the monthly repayments to help bring EV purchase costs to levels closer to petrol or diesel vehicles, the people said.

The move would be welcomed by the car industry — which has struggled to sell EVs in volumes required by government targets — and would be tantamount to an admission that the consumer subsidies scrapped in 2022 were phased out too early.

Although EVs remain more expensive to buy outright than traditional engine-driven vehicles, more than 80 per cent of the new cars in the UK are bought using finance or lease deals according to the Finance & Leasing Association.

Carmakers have been urging ministers to introduce new demand-side measures to encourage consumers to buy more electric cars, as well as to accelerate the rollout of charging points. 

Sales of EVs are growing in the UK, but remain far below official targets, and are concentrated in the company car sector, where generous tax incentives still exist.

Car manufacturers such as Volkswagen, Ford and Renault are under pressure to hit stretching targets for EV sales under the government’s “zero-emission vehicle mandate”, which requires a certain percentage of each carmakers’ annual sales to be zero-emission vehicles. 

The percentage is set to rise from 28 per cent this year to 80 per cent in 2030, with companies facing fines of £15,000 for each missed vehicle. 

Stellantis last year said the costs of complying with the scheme was partly behind its decision to close its Luton van factory, putting 1,100 jobs at risk, while Ford also blamed the mandate as it cut 800 UK roles last year in a wider European restructuring.

EVs accounted for 19.6 per cent of new cars sold in the UK last year, which was below the required 22 per cent target, according to figures from the Society of Motor Manufacturers and Traders. 

The government is currently consulting the auto industry on how to improve the “arrangements and flexibilities” in the scheme to try to give manufacturers more breathing space. 

Ministers are unlikely to bring back cash incentives for EV purchases because of the direct cost to the Treasury. The previous plug-in car grant scheme, which paid out £5,000 for an EV, was reduced over time and eventually scrapped in 2022 by the Conservative government.

The potential intervention on EVs comes after Labour chancellor Rachel Reeves weighed into a Supreme Court case to prevent the motor finance sector having to pay out billions in compensation to consumers.

The rise of pay-monthly deals for car purchases has transformed the country’s auto finance sector. The most popular finance deal is called a “personal contract purchase”, which is a pay-monthly scheme that sees motorists finance the value a vehicle loses over three years rather than the total cost of the car. 

The collapse in used prices for electric vehicles in the past two years means that EV repayments are typically higher than for petrol cars.

Adrian Dally, FLA’s motor finance director, said zero-interest loans would not fully equalise the cost between EVs and internal combustion vehicles, but he added: “If there was a way where the government could underwrite cheaper loans . . . that would be extremely helpful.”

The impact of the scheme on the public finances will depend on how the UK decides to structure any support. Ministers hope that a change in the government’s debt target to a new measure called “public sector net financial liabilities” — that counts more assets alongside public liabilities — could help the proposal.

A Department for Transport spokesperson declined to comment on the FT report but said 2024 was a “record year for switching to electric” with 382,000 EVs sold and nearly 20,000 public chargers added to the network.

“We’re investing over £2.3 billion to support industry and consumers make the switch.”