5 car loan traps to avoid

article header

We all love our cars, and can talk endlessly about speed, torque and engines, but unfortunately many of us struggle to understand car loans.

Finance is often dry and confusing, so I get why people would rather watch paint dry than read up about car loans. Ignorance, however, is not bliss, because making a mistake with your car loan could cost you thousands of dollars.

Here are the five top mistakes people make:

Mistake 1: Getting the car before the loan

One trap excitable shoppers make is to buy the car before the loan. It’s like watching your new car crash in slow motion. If you fall short on the finance side, then you can kiss goodbye to any deposit you’ve laid down, and the car of your dreams.

Before you even hit the showroons, get your finances in order. A good first port of call is to check your credit history so you know there are no forgotten gremlins in that closet. Then start thinking about what type of loan you need and how you might want to finance it.

Even if nothing goes wrong, it’s never a good idea to rush something as important as a car loan. It’s important you have time to weigh up your options so you can choose the best loan, rather than be forced to settle for the fastest loan.

Mistake 2: Failing to use a car loan calculator

Don’t make the mistake of starting the finance process without first using a car loan calculator. Knowledge is power, so you want to make sure you’re fully armed before you do battle with lenders.

The beauty of a car loan calculator is that you can explore a range of repayment scenarios by punching in different borrowing amounts, interest rates, loan terms and repayment schedules. The more you understand your borrowing capacity, the less likely you’ll be shunted into a second-rate loan.

Mistake 3: Getting sucked in by advertised rates

One trap that’s easy to fall into is to focus on the ‘advertised rate’ rather than the ‘comparison rate’. The advertised rate doesn’t include fees; it’s an artificially low figure designed to entice unwary consumers. The comparison rate, though, does include fees. When it comes to car loan shopping, it really is your best ally.

A recent car loan comparison search on RateCity shows how falling into the advertised rate trap could cost you hundreds of dollars over the life of your loan.

Westpac Bank of Melbourne BCU
Advertised rate 8.49% 6.99% 5.90%
Comparison rate 9.67% 8.11% 6.82%
Difference 1.18% 1.12% 0.92%

Mistake 4: Ignoring the true cost of balloon payments

Balloon payments are another car loan trap that can ensnare unsuspecting borrowers. Just like with advertised rates, lenders use this sleight of hand to make a loan seem smaller than it is.

In this instance, the lender lures in the borrower by offering reduced monthly repayments. The catch, though, is that the borrower has to pay a one-off lump sum – or balloon payment – at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.

Mistake 5: Waiving your right to make early repayments

Repaying a car loan as soon as possible seems like a sensible move and the sort of behaviour that ought to be encouraged. Unfortunately, some lenders will penalise you with an early repayment fee, designed specifically to recoup any interest lost as a result of the expedited loan term. It’s definitely a caveat you want to avoid if you think you might be able to get ahead on your loan. There’s nothing worse than paying extra for something just because you are early.


^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

Compare your product with the big 4 banks, or add more products to compare
As seen on