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Introduction Perception of illness (PI) and self-medication (SM) have been thoroughly explored in the existing literature. However, there is a lack of understanding about the mediating effect of health literacy on PI and SM in a non-homogenous population like Saudi Arabia. As such, primary healthcare nurses who have constant interaction with the outpatients have difficulty addressing self-medication. This study aimed to investigate health literacy as mediator between PI and SM among outpatients in the Kingdom of Saudi Arabia (KSA). Methods This study employed a cross-sectional approach and was conducted at 10 major primary healthcare (PHC) clinics serving 30 million individuals in 13 different regions of KSA. The 424 outpatients who participated in this study were selected through convenience sampling. Data collection started in November 2022 and concluded in February 2023. Results The mean of the BRIEF (health literacy), self-medication scale (SMS), and PI scores were 13.01 ± 3.32, 27.46 ± 7.01, and 45.56 ± 7.69, respectively. There was a significant relationship between the age and BRIEF scores (p = 0.039), and the level of education was significantly related to all variables, as were nationality and BRIEF scores (p = 0.001). Finally, occupation was significantly related to BRIEF and SMS scores (p = 0.001 and 0.003, respectively). Completing college and being non-Saudi had positively significant effects on health literacy (p < 0.01). The structural equation model (SEM) found no effect of PI on health literacy or SM behaviour (p = 0.263 and 0.84, respectively), but health literacy did have an effect on SM behaviour (p˂0.001). Conclusion One of the most effective ways to decrease the prevalence of SM and the associated risks is for primary healthcare nurses to promote public health literacy alongside the control of other conditions.