Zero-percent financing turns heads, but car buyers who qualify still need to do the math

Lifestyle and Budget Associated Press

When a car dealer offers to loan you the money to buy a car at zero interest, it gets your attention. Yet that cheap money might not be the best deal you can get.

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Dealers can offer zero-percent financing through automakers' finance companies because, unlike banks, they make money on the sale of the car and don't need to rake in interest payments. Zero-percent financing offers have been common in the last four years as auto sales recovered from the recession while interest rates remained low, says Philip Reed, a senior editor of consumer advice at the car shopping site Edmunds.com.

Not everyone will qualify. Zero-percent financing is generally reserved for those with the very best credit. Experian Automotive, which tracks auto loans, says 7 percent of new car loans had an interest rate of 1 percent or lower in the first quarter of this year. By comparison, 29 percent of new car loans had interest rates of 2.05 percent and below.

Before biting on the zero-percent financing, check for other deals such as cash-back offers. Fiat Chrysler, for example, currently has two offers for the 2015 Jeep Cherokee SUV: zero-percent financing for 60 months or a $2,000 rebate. Edmunds recommends taking the cash to reduce your total loan amount for the base all-wheel-drive model from $27,123 to $25,123. Even with a 2-percent interest rate, you'll wind up paying $440 per month with the cash deal. That compares to $452 per month with zero-percent financing.

Late summer is a particularly good time to scout for deals, and automakers will soon be trying to clear 2015 models off their lots. Ford is currently offering no-interest financing for up to 72 months on most of its cars and SUVs, while Toyota is offering zero-percent financing on the Camry and Prius sedans. Buyers can also get zero-percent financing on the Buick Enclave and Hyundai Santa Fe SUVs.

Here's some more advice on financing from the experts:

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— HOW GOOD IS YOUR CREDIT?: According to Experian, new-car buyers who obtained interest rates of 1 percent or less had an average credit score of 754. For reference, that's considered "prime" credit; "super prime" scores go all the way up to 850. The average credit score for a new car buyer in the first quarter was 713, and the average interest rate was 4.7 percent. Reed says it's good to know your score before you go to the dealership. Even better: Get preapproved for a car loan through a bank or credit union before going to the dealership.

"It puts you in a stronger position when you go into the finance room to say, 'I'm preapproved at 2.9 percent,'" he said. "They will try to beat that. Dealership financing can almost always beat banks and credit unions."

— DO THE MATH: Buyers can currently get zero-percent financing for 60 months on a 2015 Toyota Prius, or get $2,250 in cash. The cash-back offer will lower your monthly payments if you get an interest rate of 3 percent or lower, because even though you're paying more in interest, you lowered the overall price of the car. But if the rate is higher than 3 percent, zero-percent financing will lower your payments.

Down payments, regional incentive offers and the value of trade-ins can also affect the calculations. Calculators on sites like Edmunds.com and Autobytel.com let buyers crunch all the numbers. Manufacturers' Web sites list available incentives on every vehicle by ZIP code.

— SET YOUR EXPECTATIONS: Zero-percent deals are generally only available on a limited number of models in the showroom. So if you want certain options or premium models, they may not be available. KBB.com, a car shopping site, advises buyers to first negotiate the price. Once a buyer qualifies for zero-interest financing, the dealer is less inclined to haggle.