Buying a car in Malaysia has always involved navigating complex hire-purchase calculations. Most borrowers simply look at the monthly instalment without truly understanding how interest is charged — and how much more they actually pay over time.
But this is finally changing.
The Malaysian government has passed long-overdue amendments to the Hire-Purchase Act (HPA), marking one of the biggest reforms to consumer financing in decades. The update will abolish the flat rate and the Rule of 78, replacing them with a fairer, transparent method that gives borrowers better control and real savings, especially when settling loans early.
Here’s what every car buyer should know.
1. The Flat Rate & Rule of 78: Why They Were a Problem
For years, car loans in Malaysia relied on two outdated systems:
a) Flat Rate Method
Interest is calculated on the original loan amount, not on what you still owe.
Example:
Loan amount: RM12,000
Rate: 6%
Total interest: RM720
You pay interest as if you still owe RM12,000 every month — even when your balance is just RM1,000. Clear, but extremely unfair.
b) Rule of 78
This method doesn’t change the total interest — it changes when you pay it.
It “front-loads” interest into your first few payments.
So in Month 1, a big chunk of your instalment goes to interest, not the principal.
By Month 12, only a tiny portion goes to interest.
The problem:
If you settle early (e.g., Month 6), you’ve already paid most of the interest upfront. Your savings are tiny.
These systems financially penalise responsible borrowers who want to clear debt faster.
2. The New Law: Fairer Car Loans With the Reducing Balance Method
The landmark change brings Malaysia in line with countries like Australia, Singapore and the UK.
Under the reducing balance method, interest is calculated monthly based only on what you still owe.
Example: 6% interest on RM12,000 loan
- Month 1 interest: RM60
- Month 12 interest: RM5
As your principal goes down, your interest goes down.
And if you settle early, you save proportionately — finally rewarding good financial behaviour.
3. Effective Interest Rate (EIR): True Transparency for Borrowers
Lenders must now clearly display the Effective Interest Rate (EIR) in:
- brochures
- car loan ads
- financing agreements
Why this matters:
EIR reflects the actual cost of borrowing.
It allows consumers to compare loans apples‑to‑apples, instead of relying on misleadingly low flat-rate figures.
4. Digital Signatures Will Make Car Buying Faster
The amendments allow:
- digital signing
- electronic loan agreements
- fully online processes
This removes the need for physical documents and in‑person signing — making car purchases smoother, especially for nationwide buyers.
5. What About Existing Car Loans?
If you already have a car loan, there’s good news:
- You may switch to the new reducing balance method
- Both you and your lender must agree
- Some lenders may adopt the new system early, even before full enforcement in 2026
Watch for official notices from your bank.
6. When Will the New Rules Take Effect?
Banks and lenders have 18 months to update their systems, but many are expected to adopt the new method early.
Full implementation is expected in the first half of 2026.
What This Means for Malaysians
These changes represent a major win for car buyers:
- Fairer interest calculations
- Real early settlement savings
- Transparent, honest loan cost comparison
- More convenient digital processes
Malaysia’s consumer credit landscape is evolving — and for once, the changes truly benefit ordinary people.
