April 16, 2001

Board of Directors
Ugly Duckling Corporation
2525 East Camelback Road, Suite 500
Phoenix, Arizona 85016

Re: Merger Proposal

Gentlemen:

     The  purpose  of this  letter  is to  propose  the  principal  terms of the
acquisition of all  outstanding  common stock of Ugly Duckling  Corporation  not
already owned by me through a merger with Ugly Duckling Corporation.

Merger: Ugly Duckling  Corporation  ("UDC")  shall merge with a new  corporation
     owned by me ("UDC  Acquisition  Corp.") in a merger  transaction  where UDC
     Acquisition  Corp.  will  be the  surviving  entity  (the  "Merger").  Greg
     Sullivan  will  have an  option  to  acquire  up to a 20%  interest  in UDC
     Acquisition  Corp.  and will  continue to operate  UDC's  business as Chief
     Executive  Officer.  I do not  expect  that  any  personnel  of UDC will be
     terminated as a result of the merger and I will continue UDC's business.

UDC  Shares:  As part of the Merger,  the holders of all  outstanding  shares of
     common stock of UDC not held by me (the "UDC  Shares")  shall receive $7.00
     per UDC Share (the "Merger  Price").  The Merger Price represents a premium
     of nearly 100% over the current market price of the UDC Shares.  The Merger
     Price shall be paid  partially in cash in the amount of $2.00 per UDC Share
     and the  balance  of $5.00  per UDC Share  shall be paid by the  promissory
     notes of UDC to the holders of the UDC Shares  (the  "Merger  Notes").  The
     Merger  Notes  shall  accrue  interest  at 10%,  be payable in  semi-annual
     installments  of  interest  only and mature in 10 years.  The Merger  Notes
     shall be unsecured and  subordinate to all other existing  indebtedness  of
     UDC.


<PAGE>

Page 2 of 2
Board of Directors
April 16, 2001


Conditions: The Merger is conditioned upon satisfaction of the following primary
     contingencies:

     UDC Board  Approval.  Approval of the Merger by the Board of  Directors  of
     UDC. I understand that the Board of Directors of UDC may require a fairness
     opinion before granting approval.

     UDC  Shareholder  Approval.  Approval  of the Merger by the  holders of the
     required  number of UDC  Shares.  If the  holders  of 5% or more of the UDC
     Shares exercise statutory  appraisal rights,  then I may elect to terminate
     the Merger.

     Creditor Approval.  Approval of the Merger by all creditors of UDC that may
     have a right to object to the Merger.

     Regulatory  Approvals.  The  receipt  of  any  approvals  required  of  any
     applicable governmental agencies.

Disclosure:  I intend to revise the Schedule 13D and the Schedule  13E-3 I filed
     with the Securities Exchange Commission  regarding my possible intention to
     acquire additional UDC Shares to disclose this proposal.  Each party agrees
     that it will not issue any press  release or other  disclosure  relating to
     the proposed  transaction  without the prior  approval of the other,  which
     shall not be  unreasonably  withheld or delayed,  unless such disclosure is
     required by applicable  securities laws (in which event prior notice of the
     contents of the proposed disclosure shall be furnished).

Documentation:  This  proposal  of the  principal  terms of the Merger is not an
     offer and does not create any legally binding  obligation  (except that the
     last  sentence  of the  preceding  paragraph  shall  be  binding  upon  the
     parties).  However,  we agree to use good  faith  efforts  to  prepare  and
     execute mutually  acceptable  merger documents and neither party shall have
     any legally binding obligation to complete the proposed  transaction unless
     and until mutually acceptable Merger Documents are executed.

     Please respond by April 25, 2001,  2000. You may contact me at 602-778-5001
if you any questions or comments regarding the proposed Merger.


                                        Very truly yours,


                                        Ernest C. Garcia, II