Carvana & DriveTime Relationship and Subprime Loan Performance Analysis

Introduction

The performance of Carvana’s subprime loan portfolio, which represents an estimated ~40% of Carvana’s total loan book, has long been a topic of scrutiny, partly fueled by concerns with its intricate relationship with Bridgecrest, the loan servicer and subsidiary of DriveTime, owned by Ernest Garcia II. 

This connection raises questions about potential conflicts of interest, as Garcia II is the father of Carvana’s founder and CEO, Ernest Garcia III. The overlap between the two entities (Carvana and Bridgecrest) has drawn questions around the extent of the related party transactions, the purchaser of Carvana’s private loan sales, and the underlying commercial relationship between DriveTime and Carvana. 

In 2022, we discussed how important subprime loan profitability is for CVNA. Given ~40% of originations are subprime which are ~50%+ more profitable than prime loans, a significant portion of Carvana's gross profit, and therefore group EBIT, is driven from subprime financing.

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This research piece aims to explore the history of Bridgecrest and shares some observations when comparing Carvana’s non-prime loan performance to competitors. 

History of DriveTime & Bridgecrest

DriveTime’s story begins in 1977 when Thomas S. Duck, Sr. founded Ugly Duckling Rent-A-Car System in Tucson, Arizona. The company initially focused on car rentals and grew to become the fifth-largest car rental company in the U.S. by 1985. Four years later, Ugly Duckling filed for bankruptcy.