Uber enters the subprime leasing business to get new drivers in cars

Despite still wrestling with the aftermath of the subprime mortgage crisis of 2007, Wall Street is throwing its weight behind another subprime lease market, this time in the form of a $1 billion dollar investment in Uber’s short-term leasing subsidiary.

Run by former Goldman Sachs commodity trader Andrew Chapin, Xchange Leasing – which partners with auto dealerships, advertises to drivers and manages risk, including sourcing repo men – offers a line of credit for people who have struggled to secure loans from other lenders.

Lease terms for Uber’s Xchange program include a US$250 deposit upfront and weekly payments of between US$106 and US$139 over the three-year life of the lease, depending on the car. If the drivers want to buy it at the end of the lease, they’ll need to pay the residual value.

But the program is likely less about moneymaking and more about getting more Uber drivers on the roads says Hamid Akbari, founder of BlankLink – which has developed several ride-sharing apps – and an assistant professor of strategic management at the University of Ontario Institute of Technology in Oshawa.

“It seems about 30 per cent of Uber drivers are leaving after the first 12 months which means that Uber has to bring in more and more drivers,” explains Akbari adding that if a driver signs up with the lease program, they’re more likely to stick around.

He points out that other competitors in the rideshare program have launched similar programs but Canada has yet to see an Xchange Leasing-style program, partially due to differences between leasing and legal structures in Canada.

“With that said, I could imagine that once a few months or a year or so of the program proves successful then it’s very likely they’re going to bring it to Canada as well,” he says. At press time, Uber hadn’t responded to requests for comment as to whether or not it has plans to develop a similar program north of the border.

Uber did, however, announce a partnership with Toyota a few weeks ago with the Japanese automaker investing an unnamed sum in the ride-sharing king. The deal will help Uber finance and lease its way to another 100,000 drivers this year.

But it’s not the first ride-sharer to get cozy with the auto industry. Last week Volkswagen pumped $300 million into Uber rival Gett Inc. based out of Tel Aviv earlier and General Motors invested $500 million into Lyft, the second largest ride-sharing company, in January which also included GM’s president joining Lyft’s board.

“As the model changes from car ownership to ‘I don’t need to own a car anymore’ (these companies) want to be able to be in the game,” says Akbari.

As for delving into the subprime loan market, the ride-sharing expert says he wouldn’t be surprised to see companies like Uber and the automakers put programs in place to avoid being undercut by cottage industries that tend to crop up around disruptive businesses and whittle away at the market share.

He says he just worries about the repercussions.

“I don’t want to compare to the subprime mortgage crisis because it’s a very different scale but at the end of the day you’re going back to the subprime lease (part) because I don’t think it’s going to be as much about making profit out of these leases,” says Akbari. “It’s about having those drivers on the road so Uber can continue offering those services.”