When things get tough in the auto industry, loans start being made for zero interest as a means of roping buyers into the dealerships. For an every suspicious public, it might seem like there is something fishy going on. So, is there?

The quick answer to the question is that there is not anything fishy happening. The financing is rarely offered by the dealer. Instead, it is offered by the car company that makes the vehicle. This means there is a profit margin between what the company incurred in building it and what the dealer pays for the vehicle.

This profit margin is an area where the car company can move money around. Most of the companies own or are closely associated with their own finance company. General Motors, for instance, did its financing through GMAC for years. Regardless, this allows the companies to offer the zero interest loans. They in turn pay a wholesale rate on the interest back to the lender. It eats into their profits a bit, but the cars move off the dealer lots which more than makes up for the loss.

Are zero interest loans always the best option? Well, "always" is a dangerous word, so you should read the fine print of the loan agreement closely. Still, these loans are usually the best you can get. There is one exception and that is rebates offered by the dealer. The larger the rebate, the more likely it is that you will save more money taking it and getting a loan that charges interest. The term of car loans is so short that you won't pay a lot of interest over the four or five years you make payments. If the rebate is more than the total interest you'll pay, take the rebate!

Zero interest car loans may seem like they should have some major catch. The truth is they rarely do. Read your proposed loan agreement closely, but you usually can't go wrong with a zero interest loan. It's free money!