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There’s trouble brewing in the auto loan industry and it doesn’t bode well for lenders or consumers if the costs keep mounting. The first signs of trouble were largely ignored – the total amount of outstanding auto loan debt has increased more than 50 percent since the end of 2010, driven largely by subprime borrowers. As a result, delinquencies among subprime borrowers have increased over the last year, amounting to more than $1 billion in non-collectable debt by the end of 2016.
There have been recent efforts by many auto lenders to clamp down on subprime lending, but the damage has already been done. All of this has led to a new and more costly problem of an increase in auto loan fraud that is expected to cost the industry as much as $6 billion this year. That’s a nearly threefold increase in just the last few years. This newest problem is likely to get worse for the auto loan industry before it gets better and consumers will likely end up paying for it in the end.
Reasons Behind the Increase in Auto Loan Fraud
The increase in auto loan fraud can be attributed to three main factors. The first is the massive increase in subprime auto lending that occurred over the last eight years. Such an increase in financial activity is bound to attract fraudsters who can capitalize on the frenzy.
The second factor is the marked decrease in credit card fraud activity, largely due to improved fraud prevention technology such as EMV chips in credit cards. Fraudsters are in the business of stealing money, and if they lose one outlet, they’ll always find another.
The third factor is the ease in which identity thieves fabricate identities through the use of purchased private information. Information such as names, addresses, birth dates, account numbers, and Social Security numbers are becoming increasingly available to thieves who know where to buy it.
As it turns out, car loans are becoming a preferred target because of the amount of money involved and the ease in which cars can be sold. It’s also difficult to trace auto loan fraud back to the fraudster. It could take months before a lender realizes that fraud was involved because it will spend much of that time going after the borrower whose identity was stolen. By then, the car will be on a barge headed to some other corner of the globe in some theoretical scenarios.
Consumers Will Lose Out in the End
Fraud experts for the industry have pegged the potential losses somewhere between $4 and $6 billion, which dwarfs the industry losses due to delinquencies. The wide estimate range reflects the lack of actual reporting of fraud by dealers and loan companies. Consumers have already been feeling the effect of increasing delinquencies in the form of higher loan costs or reduced access to subprime loans.
Some of the larger auto loan companies are simply cutting off the lending spigot for subprime borrowers. As an industry will do when it incurs increased costs, the auto loan industry will do what it can to pass those costs along to consumers.
Author: Jeff Gitlen