Uber’s claims to be a steady income supplier have grown shakier with every labor lawsuit and fare cut. Now an investigation by Bloomberg goes inside the world of the company’s year-old, Delaware-based auto-financing subsidiary, Xchange Leasing LLC, whose model appears to be as predatory as they come.
Somewhat like the subprime mortgages that imploded the U.S. economy in 2008, Xchange appears to target consumers who don’t have the credit to qualify for a conventional car lease. According to Bloomberg, Xchange is leasing cars using a line of credit worth $1 billion, which exposes the risky leases to “many of the world’s biggest financial institutions,” including Goldman Sachs, Citigroup, JP Morgan, Morgan Stanley, and Sun Trust. Meanwhile, the seemingly “low” weekly or monthly payments that these leases offer credit-poor consumers can quickly skyrocket far above the real value of the car, locking drivers into a deal many can’t ultimately afford.
According to an Uber spokesperson*, 10 to 15 percent of people who sign up to be drivers are qualified, but don’t have the right kind of car and are unable to buy one due to bad credit. Xchange leases are designed to address this, and are “more flexible” than other subprime car lease options. Through Xchange’s partnerships with key auto dealerships, drivers can opt to return the car after the first 30 days of their lease without any impact to their credit or penalties, apart from payments and an initial $250 deposit. Unlike other leases that charge drivers per mile after a certain threshold, Uber’s leases offer unlimited mileage. It’s a way to keep drivers in their seats.
Subprime leases seem to help further that goal. Bloomberg profiles Shawn Hofstede, a former Uber driver in the Dallas-Fort Worth area, who leased a 2016 Toyota Corolla through Xchange in November 2015 at $155 a week, which was automatically deducted from his Uber earnings. (For comparison, at the end of 2015, the average weekly payment to lease a new car was just over $100—for people with all levels of credit scores.) But then Uber started slashing its fares to compete with Lyft. This essentially indentured Hofstede to his car, Bloomberg reports:
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."
Hofstede told Bloomberg he wound up unable to make those payments, and having to abandon his car. It was repossessed in the dark of night. That’s one apparent example of this program’s short-term impact on drivers. Long-term, it can be just as ugly. Other Uber drivers profiled in the story have Xchange leases that will require them to pay 50% to 100% more than the Bluebook value of their cars, should they ultimately choose to buy them. One L.A.-area driver, Brandie Schmitt, says that paying off her Xchange lease has helped to build up her credit. But it’s still been incredibly expensive to do so. One week in May, her payment to Xchange reportedly ate up about a third of her Uber earnings. An Uber spokesperson explained that this is the “premium” drivers pay for a more flexible lease.
Uber has been in the subprime lease business since at least 2013, when it first partnered with Santander to finance vehicles to drivers with poor or zero credit. Santander was subpoenaed by the Department of Justice in 2014 for being a leading issuer of securities connected to subprime auto leases. Uber’s relationship with the company ended last year.
Now, besides launching its own financing subsidiary with Xchange, Uber has also partnered with Toyota—which also bought a small stake in the company—to lease out cars. Bloomberg reports that this year, between its new financing and discount programs, Uber said it “will put more than 100,000 drivers on the road.”
That also seems to complicate the company’s eco-friendly promises to remove cars from the road. Of course ride-hailing’s effects on congestion and emissions is more complex than that, and it’s quite possible that adding Ubers to the road could result beneficially in higher vehicle occupancies overall. But that defense doesn’t carry so much weight now, if Uber’s environmental and traffic benefits are coming at the cost of their drivers being financially imperiled—not only by low wages, but also, apparently, through multi-thousand-dollar leasing shenanigans.
What can a consumer do? It’s not as if the taxi industry is much better in this regard. Medallion programs have also earned comparisons to indentured servitude. At least Uber’s main competitor, Lyft, hasn’t entered the demonstrably evil world of subprime loans. It’s growing through rental programs with its investor and partner, General Motors.
Still, there seems to be room for a company that charges passengers a fare that reflects the true costs of driving, pays employees (not “contractors”) a fair wage, doesn’t prey on anyone’s poor finances, and works with local regulators to protect passengers and drivers alike. Consumers fork out for ethically-sourced products. There very well could be a market for “fair trade” rides.
*This post has been updated to include comments from an Uber spokesperson.