The ride-sharing giant's wholly owned subsidiary, Xchange Leasing, LLC, which received the massive loan, started in July 2015. Xchange offers subprime leases to people who have been cleared to drive for Uber, but have poor or nonexistent credit scores that prevent them from getting cars.
Xchange is part of Uber's larger Vehicle Solutions program, which was developed after the company realized that many qualified drivers had cars that were too old, only had two doors, or didn't meet standards in other ways, Uber told The Verge. In addition to Xchange, the program offers drivers discounts with certain automakers, traditional auto-financing, and weekly or daily rentals.
Xchange leases can cost double a car's fair purchase price
The big selling point of Xchange, according to Uber, is its flexibility. To get a lease, drivers put down a $250 deposit; then, weekly payments — which average $126 according to sample lease terms — are subtracted directly from their paychecks. Unlike traditional subprime leases, which often have strict terms, Xchange offers unlimited mileage and regular maintenance, including oil changes, tire rotations, and air filter replacement. Furthermore, unlike a traditional lease, drivers can return vehicles with two weeks' notice at any point 30 days after their first payment. When the lease ends, either through early termination or at the end of the three-year terms, drivers owe a final $250. And unlike traditional leases, a customer's credit score won't be damaged by early termination; on the flipside, leases with Xchange do not help to build a person's credit, even if payments are made in full and on time.
Despite the flexibility, critics note the high cost of these leases. If drivers keep cars for the full 36-month term, they will have spent thousands of dollars above the standard purchase price; to buy the car at that point will cost up to several thousand dollars more. One driver interviewed by Bloomberg noted that leasing his 2016 Chevy Cruze for three years, and buying it at the end of the lease, would have cost $37,200 total — more than double the Kelly Blue Book price for the car.
Subprime leases are often the only option for people with bad credit
However, high costs are typical of subprime leases and Xchange's terms are similar to other subprime leases, according to Bloomberg. Because these leases are often the only option for people who pose a credit risk, they are far more expensive than traditional financing, giving them a predatory reputation. Uber maintains that its goal is not to make money, but to get more cars to willing drivers, Bloomberg says.
The rapid expansion Uber is aiming for is not without risk, especially when leasing to people with little or poor credit history. The agreement between Xchange and its financiers loans Xchange $1 billion up front, at an undisclosed fixed interest rate, shifting some of the financial risk to investors. Uber itself has no legal obligations under the agreement. In addition to Goldman Sachs, financiers include Citigroup, Deutsche Bank AG's New York branch, JP Morgan, Morgan Stanley, and Sun Trust, sources familiar with the deal told The Verge.