Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
Key Takeaways
- Auto lending fraud has reached a record level, with dealer and borrower deception as the leading cause.
- Early payment defaults, which represent hidden fraud risk for subprime lending, are on the rise.
- Borrowers and lenders will be required to use more precise tools and wiser tactics to deal with the new reality, especially with the emergence of AI-driven fraud.
The auto lending market is seeing a troubling increase in exposure to fraud, with subprime borrowers and dealerships leading the way. According to Point Predictive’s 2025 Auto Lending Fraud Trends Report, last year’s estimated fraud losses totaled a record-high $9.2 billion.
That’s the highest level since the company began tracking the data. Nearly 70% of that threat is from what is known as “first-party fraud” — when borrowers or dealerships make up information on loan applications.
Employment and income fraud now account for $3.9 billion, or 43%, of the total auto fraud threat.
Fraud shows up in all sorts of ways: overstating income, inventing employment histories, and manipulating credit reports by using a technique known as “credit washing,” where legitimate negative information is fraudulently disputed and removed.
Others will go on to construct “synthetic identities” by blending real and made-up information, typically with Credit Profile Numbers (i.e., nine-digit identifiers falsely marketed as legal alternatives to Social Security Numbers to build new credit identities), and impersonating entirely new, non-existent borrowers.
“We’re seeing more and more people who appear creditworthy on paper but are actually red flags in disguise,” said Frank McKenna, chief strategy officer at Point Predictive. “It is no longer a matter of if fraud will hit your portfolio — it is when.”
Subprime borrowers run a real danger. Some will be taken advantage of by predators who urge them to inflate the application without realizing they’re helping the dealer commit fraud. That can come back to haunt them later.
Early Payment Defaults Are a Canary in the Coal Mine
Early payment default (EPD) occurs when the borrower stops making payments within the first six months of the loan. EPDs are extremely costly for lenders and most likely suggest that something was wrong with the underwriting process.
Point Predictive’s EPD Risk Index is up 25% from two years ago, indicating the growing problem. In most cases, the early defaults are traced back to misleading information given at the time of lending.
Point Predictive CEO Tim Grace stated, “Our analysis shows that up to 70% of early defaults involve misrepresentation on the application. That should be a big red flag for lenders.”
One of the troubling trends is the increase of “bust-out fraud.” That is when a borrower builds a solid credit history with small loans, then taps out a new car loan and disappears. It is willful, orchestrated, and has risen 26% over the last 24 months, the report states.
Subprime lenders already carry tighter margins, and these losses can be especially crippling. Their bottom lines take a hit, and they’re left covering the cost of repossessions, collections, and litigation.
The sooner fraud is detected, the better the chances of avoiding these costly consequences.
The Risks of Emerging AI
Dealerships can facilitate both the perpetration and prevention of auto loan fraud. Deceptive dealers inflate figures — like the value of a vehicle or the employment verification — just for the purpose of qualifying loans.
Point Predictive found that “systematic dealer risk” may increase a lender’s exposure by as much as 500%.
It’s not just a few bad apples behind these practices. The data shows that some of the patterns repeat themselves across high-risk dealership networks, typically targeting subprime consumers.
These consumers may be unaware their application is being forged or that the car they’re buying is worth far less than the loan they’re taking on.
“We’re seeing more and more people who appear creditworthy on paper but are actually red flags in disguise. It is no longer a matter of if fraud will hit your portfolio — it is when.” — Frank McKenna at Point Predictive
Moreover, technology is ratcheting up the stakes. The 644% growth in AI-driven fraud discussion is due to elevated activity on dark web forums, on which fraud perpetrators share tactics for employing fake documents and synthetic identities.
Now, criminals are generating fake pay stubs, IDs, and even AI-powered video calls for identity authentication. It’s like their toolbox got a high-tech makeover overnight. Clearly, a better defense must be mounted.
