I used to hear this one all the time.
A customer would state that they were entitled to a great price because they were paying 'cash' and somehow that was desirable to the dealer.

Actually, the truth is to the contrary. If a dealer was more apt to give a lower selling price to buyer based on whether they were paying cash or financing, they would definately give the lower price to the person financing! Why is that? Because the dealer makes money on the financing! Frequently they make more money on the 'back end' (financing profit) than they do on the 'frontend' (the actual net profit from the sale). The Finance or Business Manager derives his/her income from that backend profit.

Does this imply that a dealer will charge you a higher interest rate than a bank? Not necessarily. The dealership gets a 'buy rate' which is a wholesale rate normally a bit lower than what the public could get from a local bank. The Finance Manager's job is to 'feel out' how high he can pack the rate he offers without the customer balking and seeking out their own financing. So if a customer has good credit, and the Finance Manager know the customer has a credit union that offers, for example, 5.5% on a new car, then he should know he can't go too much beyond that 5.5% if he wants to keep the financing in house. He may push it counting on the 'convenience factor' for the customer of not having to fill out an application with the credit union, but he is pretty much boxed in.

The place where a finance manager can really score is when a customer has bad credit, and the TransUnion or Equifax report has already shown that they have attempted to get financing and been turned down, and that particular Finance Manager can get the financing through a sub-prime lender like Americredit. In such situations, the buyrate for the dealer may be 12%-14% and the Finance Manager be comfortable with charging 19%-21%.