Hryshchyshen Serhii/Shutterstock In my car-selling days, we had a mix of buyers at the dealership. Some paid cash, but more financed their purchases. There was leasing, too, but that's another story. Taking out a loan is logical because not everyone can pay for a five-figure purchase out of pocket. Still, many of my customers felt comfortable writing checks. It made sense, as the dealership was in a wealthy area. These buyers wanted to avoid paying interest or dealing with the hassle of monthly payments. And some, frankly, didn't want others peering into their personal financial details that come with applying for a loan. A few were under the mistaken impression that they could get a better deal by paying cash — the opposite was true. Facilitating financing (called indirect lending) is a "significant source of profit for a car dealership," says Ray Shefska, founder of CarEdge and former car dealer. That practice translated into a higher paycheck for me when I worked as a salesperson and later in the finance and insurance (F&I) department. On occasion, we could flip a cash customer into a borrower by dangling a better price on the car. In today's market, even if you can pay cash, it's worth considering taking out a loan to buy a car. Zero- or low-interest financing can put your cash to better use, and you may drive away with a better deal. However, that's not always an absolute. Understanding the realities of the 20/4/10 rule can also provide more insight into financing a new car. When paying cash still makes sense Phiwath Jittamas/Getty Images From my experience, cash-only deals were quicker and simpler. There was no discussion of monthly payments or interest rates. We could focus on the car and the bottom line. And frankly, that's the best way to approach any car deal, regardless of the payment method. Some dealers will attempt to divert your attention by highlighting the payment — $700 sounds better than $50,000. You want the opposite. Always work off of the out-the-door price (the price of the car plus all fees and taxes) before financing or a trade-in comes into play. If possible, paying cash is the best option for buyers with lower credit scores. For new cars, borrowers with credit scores below 600 could pay interest rates of 13% to 16%. That can rise to 20% or more for a used vehicle. In contrast, higher credit scores usually yield single-digit borrowing costs. Similarly, someone looking to keep their debt-to-income (DTI) ratio at a more manageable level (below 35%, according to Wells Fargo) may find that not taking on an additional financial obligation is a smart move. Ultimately, paying cash is about freedom and flexibility. There are no regular payments to make, and you can sell or trade in the car without worrying about payoff quotes or title liens. A near-record number of people are underwater on their auto loans, so paying cash helps you avoid that risk, too. Plus, some automakers may offer a cash incentive instead of promotional financing, which can sweeten a no-loan deal. Why financing can be a better move I_frontier/Getty Images As mentioned, dealers typically make money by handling loans. It can be a lump sum or a percentage of the finance charges — it varies by lender. That's money you may otherwise leave on the table by paying cash. A dealer can dip into this profit to lower the selling price. I know that sometimes all it took was an extra few hundred dollars off to close a deal. Use this to your advantage once you get to a good out-the-door price. Just ask: "How much more will you drop the price if I finance through you?" You can then decide if a loan is worth it. It's also hard to argue against special-rate financing that pops up. If you qualify, a 0% or 1.9% loan lets you invest or do other things with your money and still come out ahead financially. Keep in mind that low-interest loans may have shorter terms compared to more traditional 60- or 72-month financing. Promotional-rate loans are rare on pre-owned vehicles, and some cars can be too old to finance. If you decide to finance your purchase, you can often pay off the loan early. Perhaps the monthly payments are just a hassle, or maybe you want to improve your DTI ratio. During my car-business exploits, I never saw a prepayment penalty, but you should always confirm it before signing the loan paperwork. In addition, some dealers require borrowers to sign an agreement not to pay off the loan before a certain point (an early payoff means losing finance-charge revenue). Whether this is enforceable is a question for an attorney. One final tip: Don't tell the dealer you may pay off a loan early — those additional discounts may be held back.