How Loan Stacking Can Impact Lenders and Consumers

Loan stacking is when someone takes out multiple loans with different lenders at the same time without the intent to pay. While many consumers have more than one loan - such as a mortgage and a car loan - someone who is loan stacking might open three different credit cards on the same day before the first one even shows up on their credit report. Borrowers "stack" these loans to get more cash than any single lender would have safely allowed. This type of borrowing is viewed by some as a type of fraud when the intent is to receive a substantial loan amount without the intent to pay.

Device Fraud, a Type of Loan Stacking

In the telecommunications industry there is a specific type of loan stacking fraud called "device stacking." When a consumer finances a smartphone, tablet or smartwatch by agreeing to make monthly payments in addition to their service plan fees, they are essentially taking out an unsecured, interest-free loan. Fraudsters take advantage of these types of opportunities by opening multiple accounts with different carriers simultaneously in order to receive multiple high-cost devices without an upfront cost or intent to pay for the device or service plan.

Loan Stacking Impacts Consumers

Loan stacking can lead to higher interest rates, reduced or harder to obtain lending opportunities and increased prices on goods and services. When lenders lose money to "stackers" who default on their loans, the lenders often recover their losses through future transactions, which can result in raising interest rates for everyone. Additionally, lenders - without new and insightful tools - may become more restrictive in their lending criteria to try and reduce their future risk. This could show up as offering fewer credit opportunities, in addition to the higher interest rates.

How to Prevent Fraudulent Loan Stacking While Maintaining Consumers Access to Credit

By integrating solutions that help lenders evaluate whether an applicant is real or not into decisioning models, lenders can better identify potentially fraudulent transactions. Additionally, fraud can be stopped by lenders before it happens by using solutions that detect applicants that show risk of first-party credit abuse, which is when an individual, using their own identity, obtains credit with no intent to repay.

To help lenders stay ahead of increasingly sophisticated fraud like loan stacking, Equifax offers two AI-powered risk solutions: Synthetic Identity Risk and Credit Abuse Risk.

For consumers, the best thing you do to not become a victim of fraud is to learn how to prevent identity theft and to understand your options when it comes to protecting your credit.