Uber may be considering a small personal loan product for its drivers, according to an article at Vox.
This should be viewed with immediate skepticism by both drivers and the investing public, given how the wheels are already coming off Uber.
Uber has a long and sordid history of shenanigans with respect to driver finances.
When Uber first came on the scene, its advertisements boasted that drivers could earn as much is $96,000 a year. That amount was quickly debunked by a number of different sources, including this author.
I researched and authored a white paper that demonstrated the average UberX driver in New York City was only likely to earn $17 an hour. That wasn’t much more than a taxi cab driver was earning at the time.
In order to reach gross revenue of $96,000 per year, an Uber driver would have to drive 110 hours per week, which would be impossible.
Drivers who believed the $96,000 pitch ended up buying or leasing cars that they could not afford.
Then Uber came up with the crazy idea of arranging lease financing with a company called Westlake Financial. This also proved to be a predatory tactic , as the lease terms were onerous, and many drivers were unable to maintain payments. Lyft did something similar.
The type of loan that Uber may be contemplating may or may not be of benefit to drivers, but the most likely types of loans it offers will be highly problematic for many reasons.
Uber has apparently polled a number of drivers, asking if they have recently used a short-term lending product. It also asked drivers, that if they were to request a short-term loan from Uber, how much that loan would be for.
Depending on the state in which Uber would offer any such loan, there would be several options available. Almost all of them would be poor choices for drivers.
The absolute worst option that Uber could offer drivers would be the equivalent of a payday loan.
Payday lending has enabling legislation in over 30 states, and the average loan costs $15 per $100 borrowed, for a period of up to two weeks.
This is a terrible deal for drivers.
It’s an extremely expensive option and effectively gives Uber another 15% of the income that drivers earn. In most cities, Uber already takes 20-25% of revenue.
This would virtually wipe out, or significantly reduce, the average driver’s net take-home pay. It would make it pointless to even drive for the company.
It is possible that Uber might instead use a payday loan structure that charges less than $15 per $100 borrowed. While enabling legislation caps the maximum amount that a payday lender can charge in each state, there is no minimum.
In this case, Uber has an advantage over the typical payday lender. It has direct access to driver earnings, which makes it a secured loan, and less likely to default.
Typical payday loans are unsecured advances against a consumer’s next paycheck.
Consumers leave a postdated check with the payday lender to be cashed on their payday. If the consumer decides to default, they simply make sure there’s not enough money in their bank account for the payday lender to collect.
The payday lender has no recourse.
Because Uber has direct access to the borrower’s earnings, there is substantially less risk involved, and Uber can charge significantly less.
A number of states also permit longer-term installment loans.
These loans are often for $1,000 or more, and a consumer generally will take out that loan for one year or longer. The APR, or annual percentage rate, on these loans generally exceeds 100%.
This would still be a terrible deal for the borrower, but Uber still would have access to driver earnings to make sure the loan is repaid — unless the driver decides to borrow the money from Uber, and then stop driving for the company.
The final option is that virtually every state, or states that have banned payday loans, allows personal loans as long as they are below the standard usury cap. That is usually less than 10% per year. Uber might make those loans available. The interest rate would be reflective of the loan’s security.
In certain states, payday loans are limited to 36% APR. Payday lenders don’t actually exist in those states because it is impossible for them to do business at 36%, especially given the standard 5% default rate for payday loans.
Because Uber would theoretically have access to driver earnings, it might be able to offer loans under payday loan statutes but not charge payday loan prices.
If Uber stays within each state’s usury cap, most states don’t even require a lending license.
For loans of up to 36%, lenders are usually be required to get lending licenses and meet some other basic minimal requirements.
Yet there’s a new financial services product that few people know about that would make these loans unnecessary.
It’s a product known as Earned Wage Access, or Early Wage Access.
A number of providers are in the market with this very intriguing loan alternative.
With earned wage access, employees can get access to wages they have been earned but not yet paid on.
Because Uber generally pays by ACH every Monday, drivers who have earned a certain amount of money over the course of the week, but would like access to some of that money before payday, can obtain it using earned wage access.
The fee for this service generally runs around five dollars per pay period, and is usually limited to 50% of net earned pay. For a driver who has made $1,000 between Monday and Friday, he could get access of up to $500 for fee of just five dollars.
Most earned access wage providers are able to integrate with any payroll system. All Uber has to do is decide which service it wants to partner with, take care of the integration, and earned wages access will be available to drivers.
Earned wage access is a revolutionary financial services tool that could benefit all employees, not just those who drive for rideshare companies.
The real question is why Uber wants to get involved with making loans to its employees in the first place.
It seems unlikely that Uber actually cares about their well-being. If anything, Uber wants its drivers to be struggling financially, which will encourage them to stay on the road and continue earning for the company.
That just leaves the question of how much it can extract from its own employee base without angering that base, or regulators, for that matter.
That’s why the smartest thing Uber could do would be to either offer loans that are truly under 10% APR, or to use earned wage access.
Earned wage access would be a real benefit to employees, and would probably even give Uber some positive press for change.