A LONG-standing feature of Malaysia’s car loan system that has quietly inflated borrowing costs for decades will be abolished from June, following reforms under the Hire Purchase (Amendment) Act 2026.
The amendments, gazetted on January 30 and taking effect on June 1, introduce a structural shift in how hire purchase loans are calculated, replacing the widely criticised flat rate and Rule of 78 methods with a more transparent framework based on the Effective Interest Rate (EIR) and reducing balance calculations.
The move is expected to significantly improve cost transparency for borrowers and make early loan settlement more financially meaningful.
A system long stacked against borrowers
Under the previous structure, interest on car loans was calculated using a flat rate — typically advertised at around 2% to 3% — applied to the original loan amount across the entire tenure.
This meant borrowers continued to pay interest on the full principal even after substantially reducing their outstanding balance.
Compounding this was the Rule of 78, a formula that front-loads interest payments into the early stages of the loan.’
As a result, borrowers would settle a disproportionate share of interest within the first few years, leaving little room for savings if they chose to repay the loan early.
Industry analysts have shown that a “3% flat rate” could translate into an effective borrowing cost of about 5.5% annually — a discrepancy that lenders were not previously required to disclose.
Shift to transparency and fairness
Beginning June 1, all new hire purchase agreements must adopt the EIR standard, which reflects the true annual cost of borrowing based on the remaining loan balance.
At the same time, interest calculations will move to a reducing balance method, where interest is charged only on the outstanding amount and declines as repayments are made.
This aligns car loans more closely with housing loans, where borrowers benefit from lower interest charges over time as their principal decreases.
The EIR must also be clearly displayed in loan agreements and marketing materials, enabling borrowers to make meaningful comparisons between financing options — something that was difficult under the flat rate system.
Regulatory caps have also been introduced, limiting EIR to 17% per annum for loans of up to five years, and 16% for longer tenures.
Early settlement now financially viable
One of the most significant impacts of the reform lies in early loan settlement.
Previously, borrowers who attempted to repay their loans ahead of schedule saw minimal savings, as most of the interest had already been paid upfront under the Rule of 78.
Under the new framework, savings from early settlement are proportionate to the remaining loan balance.
Borrowers settling midway through their tenure could potentially save around half of the total interest — a marked improvement from the marginal reductions seen previously.
Transitional arrangements and existing loans
The reforms will apply to all new loans from June 2026, with a transition period extending until March 31, 2027, for financial institutions to fully update their systems.
Existing hire purchase agreements, however, will not automatically convert to the new structure.
To address this, banks have introduced a voluntary “goodwill discount” initiative, offering improved rebates on outstanding interest for borrowers who choose early settlement after the law takes effect.
The initiative applies to individuals and micro and small businesses, subject to account status.
Borrowers may also negotiate with lenders to switch to the new reducing balance method, although this requires mutual agreement.
What borrowers should watch for
For consumers planning to take a car loan after June 2026, the changes introduce several key differences.
Loan agreements will now include the EIR, providing a clearer picture of actual borrowing costs. Interest calculations will be based on the reducing balance method, making early repayment more advantageous. The amendments also allow for the digital execution of hire purchase agreements.
However, during the transition period, not all lenders may have fully adopted the new system.
Borrowers are advised to confirm whether the EIR is being applied and to request full disclosure before signing any agreement.
The absence of such information, analysts note, should be treated as a red flag.
With the reforms, Malaysia’s hire purchase framework moves towards greater transparency — a shift that could reshape how consumers approach car financing in the years ahead. – May 21, 2026
