Zero-percent financing is luring buyers to new car lots but it's playing havoc with the business of dealers who also sell used vehicles.

That's the rationale behind a sector downgrade by Merrill Lynch Monday. The brokerage cut its investment rating on a number of automobile dealers to neutral from buy, saying the enhanced financing packages being offered by Detroit could swell their inventory of used cars, in part because of a deluge of trade-ins.

Neviera also noted that all the rebates being paid out on new cars tend to offset the value of traded-in vehicles, further lowering the value of used-car inventory. Moreover, with consumers buying new cars at a record pace, future demand is uncertain.

"Our change in stance relates to the still uncertain outlook on the tone of promotions related to the new vehicle business, the effect such promotions could have (and have had) on future automotive demand," Neviera wrote.

Downgraded were Asbury Automotive ( ABG - Get Report), AutoNation ( AN - Get Report), Group 1 Automotive ( GPI - Get Report), Sonic Automotive ( SAH - Get Report) and United Auto Group ( UAG).

The shares were under pressure Monday, with each issue losing more than 7%.