And now Wall Street is making a $1billion bet on Uber’s lease business
In its relentless pursuit for growth, Uber needs new drivers, and many of those drivers need cars. To help them get started, Uber has been offering short-term leases since July through a wholly owned Delaware-based subsidiary called Xchange Leasing, LLC. It partners with auto dealerships, advertises to drivers, manages risk, and even pays repo men to chase down cars whose drivers aren’t making their payments.
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 announced a partnership with Toyota last week 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. He 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 News spoke to a half dozen drivers who have leases through Xchange. For the most part, drivers saw Xchange as their only way to get a car. Xchange was a solution to Shawn Hofstede’s money problems at first.
Hofstede, 30, started driving for Uber in the Dallas-Fort Worth area last year, using his own car. But then, during an accident on his own time, he wrecked the car and was left without the income. “I was literally screwed,” he said. Then Uber e-mailed him about its financing options.
He leased a 2016 Toyota Corolla from Xchange in November, paying $155 a week. Two months later, Uber slashed fares nationally. Soon Hofstede had trouble keeping up with his payments. He went from making $200 in a weekend to $140 in a weekend, he said. “It got to the point that I would drive just to meet my payment,” he said. “If you were short on your payment for a week it would roll onto the payment for next week. It starts adding up.”
Eventually, Hofstede gave up and stopped driving. He said he told Xchange to come get the car several times. That was in February. “I felt trapped, and then I said, ‘F— it,'” he said. “I’m not paying them.”
It was no secret where the car was; Uber had installed a GPS tracker on it. For a while, Hofstede left a note on the Corolla that read, “Dear Uber, thanks for coming to pick up the car. Call this apartment, and I’ll come out and give you the keys.” After two months passed, he stopped putting the note out. One April morning, Hofstede woke up and the car was gone; it had been repossessed overnight.
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 that 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.
Read the complete article in Bloomberg
