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 US 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 programmes, 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 US 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 programme 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 programme is plagued by a lot of questions that surround other subprime lending programnes 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 into 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, drivers 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 upfront. Many other leases also charge drivers by the mile if they exceed a certain mileage threshold. Not Xchange, though; Uber wants to incentivise 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.
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 programme isn’t meant to generate a profit, but to get more drivers in cars. They said the lease was structured so drivers could 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.
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 per cent of new financing came in the form of a lease, according to Experian, up from just 24 per cent 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.”
Xchange’s new credit facility will transfer much of the financial risk from Xchange to the banks who are participating in the deal. Besides Goldman Sachs, that includes Citigroup, Deutsche Bank AG’s New York branch, J P Morgan, Morgan Stanley and Sun Trust, according to a person familiar with the matter. The terms of the deal were not disclosed but the banks’ profit is limited to their returns on the loan to Xchange, not the performance of the leases.
Uber declined to share how many leases it has provided through Xchange. There’s a lot of churn among Uber drivers — in 2013, a Princeton researcher found that 30 per cent of drivers who started in the first half of that year had stopped working for Uber a year later — and Xchange is a way to keep new drivers signing up. The company knows those drivers may not stick around.
© Bloomberg
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
