Applying for a car loan is an exciting step toward owning the vehicle you need, but even small mistakes can lead to higher costs, delays, or rejection. Understanding potential pitfalls is key to navigating the process smoothly.

Here are five common mistakes to avoid when applying for a car loan—and how to make smarter financial decisions.

1. Not Comparing Lenders or Loan Offers

Why This is a Mistake

Accepting the first car loan offer you find might seem convenient, but car loans vary significantly in interest rates, fees, and repayment terms. Overlooking comparisons can cost you more over time.

How to Avoid It

• Take the time to shop around and compare loan options from different lenders, such as banks, credit unions, and specialist providers.
  
  

• Check the comparison rate, which includes most fees, for a clearer picture of the total cost.
  
  

• Use online tools or work with a car loan broker to simplify the process.

For example, on a $20,000 loan, a 1% difference in the interest rate can save you hundreds or even thousands of dollars over the loan term.

2. Ignoring the Fine Print

Why This is a Mistake

Loan agreements often include hidden fees or terms, such as early repayment penalties or restrictions on additional repayments. Overlooking these details can lead to unexpected costs.

How to Avoid It

• Read the loan agreement carefully and ask your lender or broker to clarify anything you don’t understand.
  
  

• Pay close attention to:

• Application and establishment fees

• Monthly account-keeping fees

• Early repayment penalties

• Late payment charges

Understanding the fine print upfront can prevent unpleasant surprises later.

3. Borrowing More Than You Can Afford

Why This is a Mistake

Borrowing the maximum amount a lender offers might let you buy a more expensive car, but it can strain your finances and increase the risk of default.

How to Avoid It

• Create a realistic budget that considers your income, expenses, and other financial commitments.
  
  

• Use a car loan calculator to estimate repayments and ensure they fit comfortably within your budget.
  
  

• Factor in ongoing car expenses like insurance, fuel, and maintenance.

Pro Tip: Consider buying a reliable used car if it meets your needs and budget better than a brand-new model.

4. Focusing Only on Monthly Payments

Why This is a Mistake

Lowering your monthly payments by choosing a longer loan term might seem appealing, but it often increases the total interest paid over the loan’s duration.

How to Avoid It

• Look at the total cost of the loan, not just the monthly payment.
  
  

• Choose a shorter loan term if you can afford the slightly higher monthly repayments—it saves money in the long run.

For instance, a five-year loan will typically cost more in interest than a three-year loan, even if the monthly payments are lower.

5. Overlooking Your Credit Score

Why This is a Mistake

Your credit score directly affects the interest rate and loan terms you’re offered. A poor score may lead to higher rates or even loan rejection.

How to Avoid It

• Check your credit score and report for accuracy before applying for a loan.
  
  

• Improve your credit score by paying off outstanding debts and avoiding late payments.
  
  

• Work with a car loan broker who specialises in bad credit loans if your score needs improvement.

Pro Tip: Even a small improvement in your credit score can unlock better loan terms and save you money.

Avoid These Mistakes and Secure the Right Loan

• Do Your Research: Compare lenders and loan options thoroughly.

• Understand the Costs: Consider both the interest rate and additional fees.

• Stick to Your Budget: Borrow only what you can afford, even if a lender offers more.

• Ask Questions: Seek clarification on any terms or conditions you don’t understand.

• Check Your Credit: Know your credit score and work to improve it before applying.

Applying for Car Loans Doesn’t Have to Be Overwhelming

Avoiding these common mistakes can help you save money, reduce stress, and secure a car loan that fits your budget and financial goals.

At Naked Loans, we make the process simple. Our experts compare multiple lenders, provide personalised advice, and help you find the best car loan for your needs.

Ready to take the next step? Contact us today and drive away with confidence.