Uber’s subprime car loans are causing a lot of trouble

Uber


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Uber, which lost $3 billion last year and found itself in a thicket of intractable problems and scandals that cost founder and CEO Travis Kalanick his job, now faces a car leasing crisis subprime.

Two years ago, when these folks started the subprime auto leasing program to put their low-paid drivers in new vehicles they couldn’t otherwise afford, they apparently didn’t do the math.

In July 2015, when the ‘Xchange Leasing’ program was announced, the company exclaimed, “We are thrilled with the way these new solutions meet the unique needs of drivers, and provide more and better choices and a greater flexibility than ever before. »

The rental program would be “administered by a subsidiary of Uber and designed to accommodate the flexibility drivers value most,” he said. Here’s how it would work:

Unlike most multi-year leases that carry high fees for early termination, drivers who participate in Xchange for at least 30 days will be able to return the car with just two weeks’ notice and limited additional fees. The program allows for unlimited mileage and the ability to lease a used car, with routine maintenance also included.

It wasn’t meant to be a way to make money – nothing at Uber is. But hi. And the company has invested $600 million in the venture, “people familiar with the matter” told the Wall Street Journal.

This type of lease was offered to drivers with subprime credit scores or no credit score who barely made enough money to get by and make the payments, if they stuck around long enough. It allowed drivers to drive new cars. When that didn’t work for them, they could return the cars after 30 days with two weeks notice. The only penalty for returning early is that Uber keeps the $250 deposit. And these leases came with “unlimited kilometers”.

No one in the automotive industry would ever design such a thing.

But Uber is different. It defies the laws of economics. Or at least that’s what he thought at the time.

Now the 14-member executive committee that runs the show has watched the math and been horrified. “According to people familiar with the matter”, quoted by The newspaperthe leaders had informed the committee in July:

The Xchange Leasing division had estimated modest losses of around $500 per car on average, these people said. But officials recently told Uber executives the losses were actually about $9,000 per car, or about half the list price of a typical rental vehicle.

“Unlimited miles” allowed drivers to work long days and return vehicles with far too many miles, which kills resale value. Also, if drivers are frustrated with their pay and quit and return the vehicle, the car may be 7 months old and have 20,000 miles on it, and be worth only a fraction of the car’s depreciated book value by Uber. .

Across the entire subprime auto loan segment, delinquencies are skyrocketing. And Uber has not been spared. Such costly repossessions hammered the program, these people said The newspaper.

Because of this subprime leasing company’s breathtaking losses – $9,000 per car on average! – the leaders agreed to close it.

The numbers are big. Uber holds title to nearly 40,000 vehicles through Xchange Leasing. He now has to collect the cars from his drivers and resell them on the wholesale market. He wants to do most of that by the end of the year. If Uber loses $9,000 per car on average on those 40,000 cars, it will add another $360 million in losses to the losses it has already accrued.

If he sells the subprime leasing business, which is another option, he will likely suffer a similar loss because the buyers of those assets will be looking at the same scenario.

And layoffs are looming. Up to 500 employees could be affected by the closure of Xchange Leasing, or around 3% of Uber’s 15,000 employees. Some people could be moved to other departments, like customer service, the people said.

To fund those leases, Uber secured a $1 billion credit facility last year from a consortium of banks including Goldman Sachs, JP Morgan Chase, Citigroup and Morgan Stanley.

Despite the crazy terms, these leases don’t come cheap for drivers. Uber figured they would be driving a lot and would have to pay more than for a standard lease. The newspaper:

A 2014 Toyota Corolla was recently offered for 130 weeks at $122 per week, for a total of about $500 per month, according to marketing materials distributed by Uber.

In contrast, leases for Corolla are advertised all over the internet for as low as $159 per month, for 24 months and 24,000 miles. But read the fine print, including the $1,499 upfront deposit and other upfront fees. And subprime buyers might not be eligible.

This type of lease allows 1,000 miles per month of driving. It’s barely enough for a rigid worker to get to work. But that’s not enough for an Uber driver, who works 14 hours a day, to pay the lease and have some money for rent.

Uber also found that dealerships, according to The newspaper“pushed drivers towards more expensive vehicles, reducing their likelihood of making a profit.” Duh. That’s what dealerships do. This is called “upselling”. Nobody warned the prodigy of Uber? So Uber hired a bunch of people, set up showrooms, and did the leasing in-house to get a better handle on the situation. With stellar results.

When a company undermines competition – such as by unknowingly massively subsidizing the cost of vehicles – and investors don’t care that their money is being burned at lightning speed, executives have no reason to change course. For them, all that matters is to dominate the market at all costs, and this is happening at a staggering rate.