Uber needs new drivers, and many would-be Uber drivers need cars. Voila! Uber auto financing. Problem is, say critics, it's a subprime lending shop that attracts drivers with poor credit.
Since July, Uber has been offering short-term auto leases through a subsidiary called Xchange which partners with auto dealerships, advertises to drivers, manages risk, and even pays repo men to chase down cars if drivers aren't making their payments, reported Bloomberg News
Xchange may be key to Uber's continued expansion as it tangles with Lyft in the U.S. and a bevy of competitors abroad.
Uber also recently announced a partnership with Toyota to finance even more cars. This year, Uber said its financing and discount programs, which include Xchange, will put more than 100,000 drivers on the road. That requires dipping into the vast pool of people with bad or no credit.
In a deal led by Goldman Sachs, Xchange received a $1 billion credit facility to fund new car leases, according to a person familiar with the matter. The deal will help Uber grow its U.S. subprime auto leasing business and it will give many of the world's biggest financial institutions exposure to the company's auto leases. The credit facility is basically a line of credit that Xchange can use to lease out cars to Uber drivers.
Xchange caters to people who have been rejected by other lenders. The program is run by Andrew Chapin, who pitched it to Uber Chief Executive Officer Travis Kalanick in 2012. Before joining Uber, Chapin was a Goldman Sachs commodities trader.
Chapin oversees all of Uber's auto-financing efforts, including a partnership with Enterprise Rent-A-Car and vehicle-purchase discounts.
"I want the driver to get an option that is best for them," Chapin said. "I try to provide a menu of options that the industry thus far has not provided."
Xchange isn't intended to be a moneymaker, said an Uber spokesman. But it has plenty of critics who accuse the company of looting the pockets of its drivers. The program is plagued by a lot of questions that surround other subprime lending programs aimed at risky borrowers with bad credit. Is Xchange really offering good deals? Does it ensnare drivers with commitments they can't meet?
"You can buy the car for what they're charging you in weekly payments," said Greg McBride, chief financial analyst at personal-finance website Bankrate.com. But for many drivers who sign up with Xchange, it's their only option.
The terms of an Xchange lease run 28 pages. Drivers pay a $250 upfront deposit and then make weekly payments to Uber over the course of the three-year life of the lease. As the video promoting the arrangement puts it: "The best part: Payments are automatically deducted from your Uber earnings."
At the end of three years, Uber keeps the $250 deposit to release the drivers from the lease. If they want to buy it, they'll need to fork over the residual value of the car, which could run many thousands of dollars. Uber declined to provide an average figure.
Uber's lease is more flexible than most subprime leases, the company said. After the first 30 days of the lease, a driver can return the car to Uber with two weeks notice, without any additional fees, apart from the payments they owe and the $250 they paid up front. Many other leases also charge drivers by the mile if they exceed a certain mileage threshold. Not Xchange, though; Uber wants to incentivize drivers to keep logging miles.
Bloomberg spoke to five auto-finance experts. Most said the leases are expensive, even predatory, compared with leases available to drivers with good credit.
"I'd say the cost is greater than the benefit for your average driver," said Mark Williams, a lecturer at Boston University's business school who reviewed the terms of a blank lease agreement provided by Uber, along with some average weekly lease payments and a driver-reported account. "The terms, the way they're proposed, are predatory and are very much driven toward profiting off drivers rather than to facilitate an increase in drivers."
Uber said the program isn't meant to generate a profit, but to get more drivers in cars. They said that the lease is structured so drivers can get out of it at any time. Besides unlimited mileage, Uber's lease also includes routine maintenance. The company also said returning the vehicle won't impact a driver's credit score, unlike other financing arrangements.
"They're making it easier to walk away, which is a good thing, but they're making it pretty expensive throughout," said John Van Alst, a leasing expert at the National Consumer Law Center.
The average weekly payment for a lease on a new car was $96 during the last three months of 2015, according to credit agency Experian. That's for everyone with all kinds of credit ratings. A typical 2013 Toyota Camry L through Xchange runs $130 a week, according to Uber.
Xchange leases are generally comparable to the terms of other subprime and deep-prime leases, experts said. That means leases can run far above the actual value of the car. Leases are growing in popularity over other vehicle-financing options. During the fourth quarter of 2015, 34 percent of new financing came in the form of a lease, according to Experian, up from just 24 percent in the same quarter of 2010.
Many of those leases are targeted at drivers with bad credit, according to Chris Kukla, executive vice president at the Center for Responsible Lending. "Subprime auto is sort of the new hot place to get into the securities market," he said. "There are some similar things going on in the auto market that look like a lot of what's been going on in the mortgage market pre-crash."
In a statement sent by Uber, Chapin said: “Many Americans don’t have enough cash on hand to buy a car. Many others could be denied leases or charged high rates due to their credit quality, and could owe thousands of dollars in penalties if they break the contract early. Xchange provides access to high quality cars with no restrictions on mileage (unlike most leases) and the ability to break the lease early with minimal fees.”
William Black, an economics and law professor at the University of Missouri-Kansas City, took issue with Uber's policy of tapping income directly. Black, a loan expert, said if Uber wanted to look out for drivers' interests, the company could develop a financing program through a credit union. (Credit unions are controlled by the people who invest with them, meaning that credit unions have a vested interest in giving out loans that are friendly to their customers.) Otherwise, he said, "There are always possibilities for very substantial conflicts."
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