Lender beware

When inflation skyrockets, central banks increase interest rates to slow spending. Here, the author details why periods of high inflation might lead to high rates of fraud in the lending industry and what lenders can do about it.

In the past year, inflation has dominated news headlines around the world, and you’ve probably felt some of its effects in your wallet as prices on everything from food and fuel to cars and houses shot up. Because inflation means higher prices, the usual remedy from central banks is to slow spending by hiking up interest rates. And while higher interest rates might ease inflation, those higher rates can mean trouble for lenders and consumers.

My organization, Point Predictive, operates an auto-lending consortium with data that suggests there’s a correlation between periods of high inflation and first-party fraud. First-party fraud, also known as “fraud for purchase,” is when fraudsters give false information about themselves such as fabricating their income. This is different from third-party fraud, which is essentially identity theft. (See “The different types of fraud and how they’re changing,” Experian.) In this column, I’ll detail why our data shows that lenders must be vigilant when interest rates are high, and some steps they can take to prevent and detect potential fraud in loan applications.