A couple of days ago, I read this post over at Graybeard’s place about subprime auto loans. I have blogged in the past about the scam that is credit scoring, and it has been a while since I have revisited the topic, so I figure it’s time to do so again.

A prime rate to purchase a new car, according to the car makers, requires a FICO score of around 720 or better. This shouldn’t be a problem, since Fair, Isaac, and Company, the company that generates FICO scores, claims that the average score is 695
The problem lies in the fact that FICO keeps their scoring algorithm a secret, and there are more than 19 different formulas that provide different scores to rate a borrower’s suitability for different products, ranging from buying car insurance to buying a home. Each scoring model places emphasis on different factors. The system isn’t as much a rating of your likelihood of paying back a loan, as much as it is a measure of how likely the company is to make money off of you. Big difference. All of this makes understanding the system nearly impossible. 
For lenders, there are different levels of risk. From least risky to most risky, they are: super prime, prime, nonprime, subprime, and deep subprime. Each one has different amounts of risk, and pay different rates and terms. To qualify for a prime auto loan, your score needs to be a 720 or higher. 
In fact, according to this article, loans break down like this:

Super prime: Score above 740
Prime: Score 680-739
non prime: Score 620-679
sub prime: Score 550-619
Deep subprime: score below 550

If 83% of Chevrolet’s loans are to customers with a 619 or less, how likely is it that the average credit score is a 695? My opinion is that the average is much, much less than 700, perhaps as low as 600.  As evidence, I bought a car last December, and I got a loan at 2.9% interest, with a 680 credit score. At the time, it was Nissan’s best offer. Why would a credit score that is below the stated average garner a prime rate?

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