The "min_dist_squared"-setting defines how far away the car has to be until the game starts to use the simple models for it.
That's why they're easy and quick to make: they don't have to be detailed at all. Sometimes, for certain cars, just a textured box can be enough.
Simple models are located in car's folder. If car's name is "Mycar", the simple model's name is "Simple_Mycar".
(Simple_Mycar.DAT , Simple_Mycar.ACT , Simple_Mycar.MAT, as in the main car)
Additionally, they can contain only one component (which is the simple 3D-model, of course), which you must name as MYCAR.1 in this case.
5 - (25 meters) = For well-detailed simple models, when it doesn't matter if they're showed quite near.
8 - (40 meters) = The default value.
12 - (60 meters) = Use this if the car doesn't have a simple model, so the car won't just disappear in the game with the default viewing distances. The game will use the detailed model a little longer, but the higher polycount lowers the framerate, though.
25 - (125 meters) = If the car doesn't have a simple model, and you are using very long viewing distances, longer than the game normally lets you have, you might like to use high values. The (detailed model of the) car can be seen very far away, which again reduces the framerates... all that detail is lost when the car is seen in the screen as a tiny bit far away.