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Is There Deception Hidden in Your Auto Loan?

Why higher default rates in 2017 could reveal hidden auto loan fraud and predatory lending.

One of the predatory lending practices that led to the 2008 mortgage crisis may have moved to the auto industry. Experts warn dishonest lending practices that result in auto loan fraud may also lead to higher default rates in 2017. That’s according to a new whitepaper reported on

The boom before the bust?

Auto loans broke a number of records in 2016. An Experian report detailed record loan amounts and term lengths last year.

  • Average new car loan: $30,621
  • Average used car loan: $19,329
  • 32% of new car loans and 18.2% of used car loan now have terms from 73 to 84 months

A separate report by the New York Federal Reserve reveals auto balances topped $1.1 trillion by the second quarter of last year. Credit Unions funded $16 billion of auto loans originated in the first half of 2016. Now, the new report warns those lenders that fraud may be hidden in higher rates of default they can expect to see over the next year. Essentially, the report means experts predict 2016 was the boom before the 2017 bust.

What is “hidden” auto loan fraud?

Hidden auto loan fraud refers to deception buried in an auto lending agreement. It’s “the misrepresentation of the application of a borrower’s identity, income or employment, as well as other key factors such as the price or condition of the vehicle.” Data shows loans containing these types of deception have higher rates of default.

Responsibility for this type of fraud lies with the loan originator, in this case the dealership. Even a borrower’s income and employment should be verified. The report states, “3% of deals are providing loans that are responsible for 100% of their known fraud and early payment default risk.”

It’s effectively the same type of predatory lending practice thought to have contributed to the mortgage and real estate market collapse of 2008. In an effort to make a sale and ensure a loan approval, the lender extends a loan that’s not good for the borrower. The borrower either can’t keep up with the payments or the property is not worth the value of the loan. Both lead to early default that’s often completely out of a borrower’s control.

How to avoid default on an unfair loan

“If you’re a subprime borrower, it increases your risk of becoming a victim of predatory lending practices,” says April Lewis-Parks, Education Director of Consolidated Credit. “It’s a good thing that lenders want to work with borrowers who may have less than perfect credit. But when it crosses the line and results in deceptive lending agreements in order to ensure a borrower qualifies, that’s a problem for everyone.”

Consolidated Credit’s financial counselors advise anyone struggling to keep up with a subprime loan to be proactive. Don’t wait for a loan to slip into default because you fall behind. This leads to credit damage and the potential to have your car repossessed.

“A bad loan becomes a burden on your budget that leads to missed payments, not only on the loan, but other obligations,” Lewis-Parks explains. “Once you fall behind and damage your credit, lenders are less likely to work with you. If you see an auto loan you took on last year has you in a bind, explore refinancing options now before your credit takes any hits.”

Given the increase in lending term lengths available today, auto loan borrowers can achieve more affordable payments with increased terms. The longer you extend the term on a loan, the more time you have to repay the amount borrowed. This means lower monthly payments.

For more information on managing your auto loans, visit Consolidated Credit’s Guide to Managing Auto Loan Debt.

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