People are using sneaky tricks to take out car loans they'll never pay

Auto lenders are increasingly running up against unscrupulous borrowers and others who use goosed up credit scores, as well as fake identities, to take out car loans that many have absolutely no intention of paying back.

"As the auto lending landscape becomes more digital and interconnected, the risk of fraud is no longer isolated to fringe cases," said Satyan Merchant, senior vice president, auto and mortgage business leader at TransUnion.

Merchant told the Detroit Free Press that he recently met with a group of auto lenders — including in-house finance arms of automakers, independent banks and others — and asked them to disclose what a major concern is right now.

More than half, he said, indicated that fraud was No. 1 on their list. When Merchant raised the question five years ago at a similar gathering, he said, the fear of fraud was far less widespread in the industry.

While fraud itself isn't new, it seems as if crime rings, everyday consumers and others have more tools and information for attacking an auto lender's blind spot.

"It's a mounting concern for the industry," Merchant said.

Sometimes, the fraud involves manipulating a credit file to make the borrower appear less of a risk.

It's a term called "credit washing."

Individual consumers and dishonest operators know how to boost a credit score by fraudulently disputing legitimate issues — including a string of delinquent payments on a credit card or a charged-off loan that has done serious damage to one's credit score.

Some consumers may be misguided by tips on social media that make them believe what they're about to attempt is perfectly legal, when it's clearly not, Merchant said. Or maybe they pick up the strategy from a friend of a friend.

TransUnion offers synthetic fraud scoring models to lenders that are designed to highlight high-risk behavior that can be masked behind seemingly strong credit profiles. The goal is to help lenders avoid the losses by avoiding making the loan in the first place, which has been the traditional role of credit scores.

Lenders, according to TransUnion, may be missing key fraud signals by relying solely on traditional underwriting strategies.

In some cases, the consumer will falsely claim that dings to their credit score took place when they were hit by an identity thief.

The consumer wrongly presents the situation as one in which the consumer is an ID theft victim to give the impression that they're not a high-credit risk themselves.

How bad credit risks

hide the real deal

Credit washing has become known as a "silent disruptor," Merchant said.

Not surprisingly, potential borrowers would want to fraudulently engineer as high a credit score as possible in many cases. And that's where lenders really can lose money.

Take a consumer who has a "near prime" credit score in the range of 601 to 660. That group typically has a 3.4% charge-off rate, meaning the lender must write off the loan and take a loss.

By contrast, a consumer who has a "super prime" score of 781 or higher, according to TransUnion, typically has a 0.1% charge-off rate. Meaning, the lender would face far less risk when making a car loan for such consumers.

Once credit washing takes place, though, the so-called "super prime" consumer who engaged in fraud to get that high score now has a 3.4% charge-off rate.

Put simply, "super prime" credit washers have a charge-off rate that is the same as legitimate near-prime auto consumers. The charge-off rate jumps to 6.6% for "near prime" credit washers — or those who need to boost their scores to get to near prime.

The average loss for a "super prime" consumer engaging in such fraud was $53,796 on auto loans. A "super prime" borrower is one with a credit score of 781 or higher.

"Fraud becomes an unpredictable loss," Merchant said.

Car loans are tempting targets

To be sure, we're talking about some fairly large loan amounts associated with these high-risk car loans. Fraudsters know how to exploit potential cracks or vulnerabilities in the lending process.

Bad actors often are going to default early in the game, perhaps within a few months, which contributes to higher losses for auto lenders.

Fraud losses in auto loans were 21 times higher than those involving credit cards, according to a new analysis from TransUnion, which was released at this week's Auto Finance Summit in Las Vegas.

The analysis reviewed loans that originated two years ago from March through September 2023. Average dollars lost were significantly higher than unsecured personal loans, too.

On average, auto fraud loss amounted to $19,611 per loan. That's significantly higher than an average loss of $940 for similar fraud involving a credit card and $3,427 for an unsecured personal loan.

The dollar losses are high, Merchant said, because sizable loans are necessary to buy increasingly pricey cars and trucks. In addition, the fraudsters are frequently finding success engaging in more sophisticated schemes.

Many times, the car loan process starts online instead of at a dealership, which might contribute to moving some fraudulent activity along.

In some cases, experts say, dishonest credit repair companies make all sorts of credit repair promises. And some trick those burdened by debt into crafting new identities to make their weak credit histories disappear.

Usually, the Federal Trade Commission notes, you cannot take action to get negative information removed from a credit report if that information is accurate. Negative information does go away over time.

It remains important for borrowers — whether they're taking out a car loan or a mortgage — to review details on their credit reports. See www.annualcreditreport.com to obtain free credit reports from all three major credit reporting companies. You can, and should, legally dispute information that is wrongly listed on your report. Reviewing a credit report can help you spot signs of real ID theft.

In some cases, the fraudsters might target the weak spots of lenders who focus on used car loans or subprime borrowers who take out modest car loans.

In other cases, crime rings may want to use fake ID information or credit-washed scores to buy luxury vehicles that they'd ship across the border or overseas for resale. At the start, the crooks have no plans to pay off the car loan.

While fraud rates remain highest among subprime and near-prime borrowers overall, TransUnion noted that recent data shows that super prime borrowers are increasingly attractive targets for fraudsters.

Fraudsters anticipate a much higher potential payoff when they're able steal ID information from super prime borrowers.

"Super prime borrowers typically qualify for larger loan amounts — often tied to high-value vehicle purchases — and more favorable financing terms," according to TransUnion.

As a result, when fraud occurs in this segment, the average loss is significantly greater, with super prime fraud losses averaging 3.3 times higher than those in the subprime tier.

Fraud incidence rates in auto lending lag those for credit card and unsecured personal loans for this type of fraud. "However, dollars lost are significantly higher across all credit risk tiers," according to TransUnion, which is based in Chicago.

Auto lending fraud differs from credit card fraud in several ways, according to TransUnion.

Credit cards involve high-velocity, real-time transactions often online. Detecting fraud here relies on behavioral and transactional monitoring.

By contrast, auto loans are typically one-time, high-value transactions conducted in person.

The in-person process has historically provided a layer of identity verification that's now eroding as auto lending moves increasingly digital, according to TransUnion.

As that shift continues, TransUnion said, the risk of auto lending fraud grows.

Stolen ID credentials

give fraudsters a boost

One term that's bandied about is what's called "synthetic identity fraud." It's a mix of real and fake information to create a fictitious identity that enables con artists to take out car loans that won't necessarily be paid back.

"With a wealth of stolen identity credentials readily available, TransUnion found criminals are getting very good at fabricating identities," according to an earlier report issued last year called "State of Omnichannel Fraud."

According to TransUnion's consumer credit data, the earlier report noted, the percentage of synthetic identities among accounts opened by U.S. lenders for auto loans, bank credit cards, retail credit cards and unsecured personal loans reached an all-time high at the end of the first half of 2024. The lenders were exposed to $3.2 billion in potential losses — also an all-time high.

The tactics of fraudsters obscure actual consumer risk faced by lenders, TransUnion stated, which can drive up loan losses even in situations when making a car loan appears to have little risk.

What can be most concerning, Merchant said, is that fraudulent behavior is increasingly prevalent among consumers in lower-risk credit tiers, where lenders typically expect better chances for getting paid.

But consumers and crooks create the impression that their credit score is exceptionally strong — giving lenders more reason to move cautiously.

Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tompor.

Personal Finance

Susan Tompor

Detroit Free Press