Barely Legally

Confessions of a Moot Court Bailiff

Bad Loans, Uber for

Here’s something new I learned about Uber: they have a self-induced subprime auto loan crisis. Via WolfStreet:

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

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

No one in the car business would ever conceive of such a thing.

​Well, sure. Those old world, analog-only auto leases were rotting from the inside out. The auto loan industry was easily disrupted because the incumbent lenders insisted on making “good deals” in which they “didn’t lose thousands of dollars.”

But this is where Uber steps in to show everyone how it’s really done.

[Uber] had been estimating modest losses of around $500 per auto on average, these people said. But managers recently informed Uber executives that the losses were actually about $9,000 per car — about half the sticker price of a typical leased vehicle.

The losses are so steep because the leases have no mileage caps, and drivers are putting absurd miles on the cars. This craters the resale value of each car, of which Uber apparently has about 40,000.

Well, okay. But the real value here is putting drivers in the seats of cars, so you can expect the $360 million in losses is really more of a loss leader for getting new drivers on the road, right?

Despite the crazy terms, these leases aren’t cheap for drivers. Uber figured they’d drive a lot, and they’d have to pay more than they would have for a standard lease. Via The Wall Street Journal: “A 2014 Toyota Corolla was recently being offered for a term of 130 weeks at $122 a week, totaling roughly $500 a month, according to marketing materials distributed by Uber.”

By contrast, leases for Corollas are advertised all over the internet for as low as $159 a month, for 24 months and 24,000 miles. But read the small print, including the $1,499 down at inception and other upfront charges. And subprime buyers might not qualify.

Long story short: these are some bad, bad loans.

It’s so weird that companies like this can spend billions of dollars of other peoples’ money to disrupt industries by undercutting the incumbents who actually try to make money. Presumably, investors realize the prices for all these disruptive services will go up. But won’t that mean the disruptor becomes the disrupted (because profit margins are a vestigial novelty left over from the 19th century, natch)?