A lot of people have a sense of entitlement. They think they DESERVE a nice new car. Forget whether they can afford it or not. My sister in law is going through this right now. She has no cash saved up and her old car just died. Her parents are considering buying a new (to them) car and selling her their old Camry, which would allow her to repay them flexibly and without interest. And she's actually unhappy at this prospect! She thinks SHE deserves a nicer car and doesn't want to drive a mid 90s Camry. But of course she can't afford a newer car.
Then she doesn't buy the car on an interest free loan. The old saying goes, "You can lead a horse to water, but you can't make it drink," applies here. If she deserves a better car, she deserves the financial ramifications that come her way.
While buying outright is (usually) financially sound, sometimes life doesn't work that way. Sometimes the interest rates (or lack there of) are too good, or other factors come into play.
I purchased a 2008 Civic Hybrid fully loaded for about $25k. I received $550 tax credit for buying a hybrid. Through the 62k miles I have on it, it's saved me about $2k worth of gas costs, and KBB has it at ~$16k in value to a private party. I've probably saved about $2k (on the conservative side) in repairs. So the rough costs of my car for the past 5 years has been about $4.5k.
In a pure financial sense, it probably wasn't optimal. However, I don't spend a lot of money on stuff, and I like having a nicer car. I don't need a $40k+ car (too cheap for that), but I like not being embarassed by my car if I have to give someone a ride.