Inside Uber’s Auto-Lease Machine, Where Almost Anyone Can Get a Car

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.

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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 driverswho 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.

"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."

In June 2015, Brandie Schmitt, 24, found herself broke in Los Angeles with what she called a "terrible" credit score. Five years earlier, a seizure put her in the hospital. Medical bills piled up, along with student debt for classes she never attended. She worked at Papa John's for a while, but then her hours got cut, and anyway, the two hour plus-bus ride to work was killing her.

After dropping $250 up front for her lease of a 2015 Honda Civic, she pays $160 a week to Xchange. If she keeps the car for the full three-year term, she'll ending up paying Uber $25,210. The Kelley Blue Book fair purchase price for a new 2015 Honda Civic SE in Los Angeles is $18,142. Schmitt said that she'll need to pay Uber another $5,000 or so to buy the car if she wants to keep it at the end of her lease.

Schmitt was referred to Bloomberg News by Uber. She drives about 25 hours a week. In one week in May, she earned $604 for 28 hours of work, she said—a slightly better-than-average week. Uber took $160 for the car directly out of her paycheck, leaving her with $444. "It's been building my credit," she said. "It's expensive … but that's because my credit isn't that great."

Uber's program is willing to take bigger risks on lease applicants than most traditional leasing programs, the company said. It has more reason to believe that someone will be able to pay them back, because they'll be making money driving for Uber, and the company gets their money before it pays the driver.

Chapin said catering to drivers with bad credit is intentional. "Just as Uber is changing the nature of car ownership for riders, it's changing the nature of car ownership for drivers," he said.

Xchange is just one part of Uber's planto create new ways for drivers to pay for a car. In addition to its new financing deal with Toyota, Uber has also struck partnerships with Cox Automotive, the owner of Kelley Blue Book and Autotrader.com, to offer another rental program in cities like Atlanta and Dallas, Texas. The company previously worked with Santander Consumer USA to provide subprime auto leases to Uber drivers; that ended in July 2015.

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, JP 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. 

Lyft is also growing through car rentals. The company is working with investor General Motors to rent Lyft drivers cars in Chicago. When GM invested $500 million in Lyft, the potential to finance Lyft drivers' cars was a major selling point of the deal.

"We're not making a profit off of the program. GM is making money," said David Rust, who runs Lyft's financing programs. "We're a middle man. Drivers get on the road."

Uber declined to share how many leases they've provided through Xchange. There's a lot of churn among Uber drivers—in 2013, a Princeton researcher found that 30 percent 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.

Damascus Durham, 28, got a lease from Xchange in January and picked up a 2016 Chevy Cruze from Team Superstores in Vallejo, California. "I only became an Uber driver for the car," he said. He pays $200 a week.

Two weeks after he picked up the car, Uber deactivated his driver account for no specific reason, he said. Durham is now struggling to make payments. Every month, he calls Uber to pay over the phone. If he keeps the lease to the end of its term, he'd end up paying Uber about $31,200. To buy the car, he'd need to pay Uber another $6,000 to cover the car's residual value, he says. The fair purchase price of the car, according to Kelley Blue Book, is $16,419.

Initially, Durham was happy about the lease. "It's great; I get a brand-new car, and now that I don't have to drive Uber people around, I'm not putting those miles on my brand-new car," he said. In a follow-up conversation, Durham's thinking had shifted. He now plans to return the Chevy Cruze and buy a car. He called the program "a scam." "I should be slapping myself," he said. "I've now read the contract."

Muhanad K. started driving for Uber in September 2014 after having fled his war-torn home country. (He declined to share his full name or the country out of fear he could endanger his family abroad.) After a few months, his car broke down.

With a subprime credit score hovering around 570, Muhanad didn't think he could get another car. That's when he turned to Xchange. He pays Uber $183 a week for a 2015 Prius. If Muhanad sticks with the lease for three years, he'll end up paying Uber $28,798. Kelley Blue Book puts the fair purchase price of a 2015 Toyota Prius at $21,985.

To afford it, Muhanad started pulling longer shifts. Six days a week, he'd sign in to the Uber app at 7 a.m. and work until 11 p.m., limiting himself to a two-hour break.

"I just wanted to make money," he said. "I come from a place where I survived hell, so this is nothing. But most people probably would not be able to handle this kind of stress."

To contact the authors of this story: Eric Newcomer in San Francisco at enewcomer@bloomberg.net, Olivia Zaleski in San Francisco at ozaleski@bloomberg.net.

To contact the editor responsible for this story: Emily Biuso at ebiuso@bloomberg.net.