Buying a car in Malaysia has long meant dealing with flat-rate interest and the infamous “Rule of 78” — both of which heavily penalise early repayments. But that’s about to change, thanks to a major revamp of the Hire Purchase Act.
With the passing of the Hire-Purchase (Amendment) Bill 2025, Malaysia is moving toward a more transparent and borrower-friendly loan structure. The two biggest changes? The abolishment of flat rate calculations and the Rule of 78 — both replaced by the reducing balance method.
Why This Matters
Under the old system, you paid the same interest every month — even when your loan balance had already decreased significantly. Early settlement didn’t save you much in interest, because most of it was already charged upfront.
Now, with the reducing balance method, your monthly interest is based on your remaining loan balance. This means:
- Extra payments go directly toward reducing your principal.
- You save significantly on interest if you settle early.
- You may even shorten your loan tenure and reduce your total repayment amount.
This change empowers car buyers with more flexibility and savings — a game changer for personal finance planning.
Other Reforms You Should Know
- Effective Interest Rate (EIR): Lenders must now display the EIR in marketing materials and loan agreements. This gives you a clearer picture of your actual borrowing cost.
- Digital Signatures: Signing car loan agreements can now be done electronically, saving you time and hassle.
- Early Repayment Discount: Borrowers in good standing (not overdue, not under legal action) will now benefit from proportional discounts for early settlement.
- Applicable to Existing Loans: With mutual agreement, current hire purchase borrowers may also switch to the reducing balance method even before full implementation.
When Will This Take Effect?
The law has been passed but awaits royal assent and gazetting. Once enacted, providers have an 18-month grace period to fully implement it — but some may adopt it sooner.
What This Means for You
This reform is one of the most consumer-friendly changes in Malaysia’s credit system in years. For Malaysians planning to buy a car — or already financing one — it’s time to revisit your loan terms and talk to your bank about this new opportunity.
