Common Loan Pitfalls & How to Avoid Them
A practical guide to understanding car loan fees, avoiding finance traps, and knowing your rights as a borrower in Australia.
Last updated: January 2025 | Based on ASIC and AFCA guidance
Getting a car loan or personal loan should be straightforward, but the reality is that many Australians encounter unexpected fees, confusing terms, or pressure tactics that leave them paying more than they should.
In 2024-25, the Australian Financial Complaints Authority (AFCA) received over 100,000 financial complaints. While not all related to car loans, misleading information and fee disputes remain common issues.
This guide explains the most common loan pitfalls, how to protect yourself, and what to do if things go wrong.
6 Common Loan Pitfalls to Watch Out For
Early Payout Fees & Break Costs
Some loans charge fees if you pay them off early. These can range from a few hundred to thousands of dollars, especially on fixed-rate or commercial loans.
Commercial vehicle loans (chattel mortgages) often have higher early exit fees than consumer car loans.
How to protect yourself:
- Ask about early payout fees before signing
- Check if fees reduce over time (many do)
- Compare total cost including potential exit fees
- Consider variable rate if you might pay off early
Balloon Payment Surprises
A balloon payment is a large lump sum due at the end of your loan. While it reduces monthly repayments, many borrowers are caught off-guard when the balloon comes due.
A balloon payment usually means you pay more interest overall, even though monthly payments are lower.
How to protect yourself:
- Understand exactly how much the balloon will be
- Plan how you'll pay it (save, refinance, or trade-in)
- Calculate total interest with vs without balloon
- Consider if lower monthly payments are worth extra cost
Dealer Finance Traps
Car dealers often offer finance that sounds attractive but includes hidden costs, inflated interest rates, or unnecessary add-ons like extended warranties and paint protection.
According to ASIC, some dealers charge establishment fees as high as $9,000 on a $49,000 loan.
How to protect yourself:
- Get pre-approval from a broker or bank first
- Compare the dealer's offer to independent finance
- Question every add-on and fee
- Don't feel pressured to decide on the spot
Yo-Yo Financing (Spot Delivery)
You drive the car home thinking finance is approved, then get called back days later to sign new paperwork with worse terms because the original finance "fell through".
This tactic pressures you to accept worse terms because you've already taken the car.
How to protect yourself:
- Don't take delivery until finance is formally approved
- Get written confirmation of approval
- Read the fine print about conditional approvals
- Walk away if terms change after you've signed
0% and Low Interest Deals
Zero percent or very low interest deals often come with catches: reduced trade-in offers, no negotiation on price, or the interest-free period only applies to part of the loan.
The "savings" on interest may be offset by paying more for the car or getting less for your trade-in.
How to protect yourself:
- Compare the total cost, not just the interest rate
- Check if 0% applies to the whole loan term
- Negotiate the car price separately from finance
- Get an independent valuation of your trade-in
Insurance & Add-On Products
Lenders and dealers often push add-on insurance products (GAP insurance, loan protection, extended warranties) that may be overpriced or unnecessary.
AFCA saw a 365% increase in complaints about misleading add-on insurance in 2024-25.
How to protect yourself:
- Research add-on products independently
- Compare prices with standalone providers
- Understand exactly what each product covers
- Don't feel obligated to buy through the lender
Consumer vs Commercial Loans: Know the Difference
The type of loan you have affects your consumer protections. Commercial loans have fewer safeguards.
Consumer Car Loans
Regulated under the National Consumer Credit Protection Act (NCCP)
- Responsible lending obligations apply
- Early exit fees restricted since 2011
- Hardship provisions required
- Comparison rate must be disclosed
- Cooling-off period may apply
Commercial/Chattel Mortgages
NOT regulated under NCCP - fewer consumer protections
- Less regulation on fees and charges
- Early exit fees can be substantial
- Limited hardship protections
- Comparison rate not required
- May suit ABN holders for tax benefits
Tip: If you have an ABN, dealers may push a chattel mortgage for tax benefits. Make sure you understand the reduced consumer protections before signing.
When Refinancing Can Help
If you're stuck in a loan with high fees, unfavorable terms, or unmanageable repayments, refinancing to a new loan might be the solution. However, it's not always the right choice.
Refinancing makes sense when:
- Interest rates have dropped since you got your loan
- Your credit score has improved
- You want to remove a balloon payment
- Total savings exceed any exit fees
- You need to reduce monthly repayments
Be careful if:
- Early exit fees are very high
- You're extending the loan term significantly
- You're adding more debt to the refinance
- The car is worth less than the loan (negative equity)
- You're close to paying off the current loan
What to Do If Something Goes Wrong
If you've been misled, overcharged, or treated unfairly, you have options. Here's the step-by-step process.
Contact the Lender or Broker First
Most complaints can be resolved directly. Put your complaint in writing and give them a chance to respond. They must acknowledge within 1 business day and respond within 30 days.
Escalate to Their Internal Dispute Resolution
If the first response doesn't resolve it, ask for it to be escalated. Larger lenders have dedicated complaints teams. Keep records of all communications.
Lodge a Complaint with AFCA
If internal resolution fails, contact the Australian Financial Complaints Authority (AFCA). It's free, independent, and they handle over 100,000 financial complaints annually.
Contact ASIC or State Consumer Affairs
For serious misconduct or if you believe laws have been broken, report to ASIC or your state consumer protection agency.
Need to Make a Complaint?
Contact AFCA - the Australian Financial Complaints Authority
Government Resources & Helpful Links
ASIC MoneySmart
Independent government guide to car loans, calculators, and comparison tools.
Australian Financial Complaints Authority (AFCA)
Free dispute resolution if you have a complaint about a financial product.
ASIC Credit Licence Register
Verify that a lender or broker holds a valid Australian Credit Licence.
ACCC Consumer Rights
Your rights when buying a car and dealing with dealers.
State Consumer Protection
Contact your state's fair trading or consumer affairs office for local issues.
Need Help With Your Loan?
Whether you're looking for a new loan, want to refinance, or just need honest advice, our team is here to help. We explain everything upfront with no hidden surprises.