The bitter pill beneath sugarcoated financing

What could possibly be wrong with a zero-percent auto loan? Plenty, particularly if you can't get the deal or get so excited by the financing offer that you forget to negotiate a good price for the vehicle.

Whenever dealers sweeten their deals for auto buyers, consumers should evaluate the offers carefully. Even a zero-percent loan doesn't automatically mean it's a good deal, or that it's the right one for you.

Interest-free deals are reserved for customers with excellent credit. Just how good your credit needs to be varies by automaker. Each automaker has its own financing company with its own credit qualifications.

Most interest-free financing offers require financing terms of three years or fewer. So you'll have to shell out some pretty hefty monthly payments if you qualify.

Let's say you're borrowing $20,000 to pay for your new car. With a three-year term at zero percent interest, your family would have to shell out more than $555 a month in car payments. A five-year term at 3.9 percent with monthly payments of $367.43 may be more manageable, even though you have to pay interest.

Compare loan rates
As tempting as a dealer's discount financing may seem, don't overlook deals from local banks and credit unions. This Bankrate.com search engine will help you compare car-loan rates in your area.

It's wise to have an auto loan ready to go before you set foot in a dealership. That way if a dealer wants your financing business, he's going to have to beat the best rate you've found on your own.

By shopping ahead, you'll learn what kind of financing deals you qualify for. The dealer won't be able to talk you into signing on for a loan with a higher interest rate than you deserve.

Whether you land an incentive or not, it's important to negotiate the price of the new car as well as the price of your trade-in.

Intellichoice, Autoweb.com, Edmund's Automobile Buyers Guide, AutoSite, Autopedia, Kelley Blue Book and CarPrice.com are among the sites offering timely pricing information. Do your homework.

"A consumer has to be very, very well-informed," says Robert Holb, owner and general manager of Consumers Auto Consultants. "Carefully, carefully research it. Be prepared to leave if you're not absolutely certain that's the vehicle you want and the best price."

Be sure to visit several Web sites when researching pricing information. Everything from sticker price to customer rebate information may vary. It's wise to cover all the bases. When in doubt, contact an auto manufacturer directly.

Be sure to ask about regional incentives in your area. You could save hundreds, maybe thousands more, by snapping up a regional incentive.

Don't forget to negotiate the price
Too many people equate landing a big incentive with landing a good auto deal. They're not the same thing. A big incentive can help you land a good auto deal, but it's no guarantee.

Lots of new-car buyers learned that lesson the hard way last year. They nabbed zero-percent financing, but failed to negotiate the price of the car.

"There were many, many people who paid much more than they needed to," says Holb.

Many folks would have been better off negotiating the price of the car, snapping up a cash rebate and taking a loan from a local bank or credit union.

Not sure how to choose between discount financing and a hefty cash rebate? This calculator from Bankrate.com will help you crunch the numbers.

Keep in mind -- anyone who purchases a vehicle with a cash rebate gets the rebate. But not everyone qualifies for discount financing, especially those zero-percent deals.

-- Updated: Jan. 12, 2005