KUALA LUMPUR, Nov 14 — Buying a vehicle in Malaysia is set to become fairer for consumers, thanks to long-awaited amendments to the Hire-Purchase Act (HPA) that will overhaul how car loan interest is calculated.
The changes are designed to give borrowers more transparent terms and greater savings, especially on early settlements.
Here’s what you need to know.
What is the biggest change?
The new law abolishes the “Rule of 78” and “flat rate” interest calculations for all future hire-purchase loans.
These will be replaced by the reducing balance method, a more fair and simple formula that is already the standard in countries like Australia and the UK.
The way your interest is calculated has a huge impact on how much you pay and when.
Here’s how the methods differ, using a simple example of a RM12,000 loan over 12 months at a 6 per cent annual interest rate.
Old method 1: Flat rate
This is the simplest but most misleading way to calculate the total interest. The interest is calculated on the full original amount for the entire loan period, regardless of how much you’ve paid back.
Calculation: RM12,000 x 6 per cent = RM720 total interest. Your total repayment is RM12,720, or RM1,060 per month.
In the example above, you continue paying interest on the full RM12,000 every month, even when you only have RM1,000 left to pay.
It is simple, but it is unfair to the borrower.
Old method 2: The Rule of 78
The name “Rule of 78” comes from the sum of the digits 1 through 12 (representing months in a year), which adds up to 78. This sum is used as the denominator when calculating how much interest is allocated to each month, with the month being the numerator.
This rule takes the RM720 in total interest calculated by the flat rate and determines when you pay it. It “front-loads” the interest, meaning you pay a much larger portion of it in your early instalments.
Let’s see how this affects your monthly payment of RM1,060.
- Month 1: Out of your RM1,060 payment, a huge RM110.77 goes to interest. This means only RM949.23 is used to pay down the actual RM12,000 you borrowed.
- Month 12: Out of the same RM1,060 payment, only a tiny RM9.23 is for interest. A much larger portion, RM1,050.77, now goes towards clearing the principal.
The problem: Because most of the interest is paid off early, if you decide to settle your loan after six months, you would have paid off very little of the actual RM12,000 principal. This means your early settlement savings will be minimal.
It heavily penalises borrowers who want to pay off their debt early.
New method: Reducing balance
This is a much fairer and more intuitive system. Interest is calculated each month only on the outstanding loan amount, not the original total.
In the first month, the interest on the full RM12,000 would be RM60 (RM12,000 x 6 per cent/ 12 months).
As you pay down the loan, the interest portion of your payment gets smaller each month. By the last month, when you only owe a small amount, your interest payment will be just RM5.
Since you are steadily paying down both principal and interest, settling your loan early results in significant and proportional savings. You stop paying interest on the amount you no longer owe.
What about existing car loans?
The new rules can also apply to existing car loans, provided both you and your lender must mutually agree to switch to the new reducing balance method.
Lenders may also do so even before the Bill is gazetted, expected to be in the first half of 2026, so look out for related notices.
What other changes are coming?
The amendments also introduce two other key consumer-friendly changes:
Clearer interest rates: Lenders will now be required to display the Effective Interest Rate (EIR) in all marketing materials and loan agreements. This gives you a true, “apple-to-apple” comparison of the total cost of financing from different banks.
Digital signatures: The process of signing loan documents will be modernised, allowing for electronic or digital signatures. This eliminates the need for physical paperwork and in-person signing now required.
The new rules will come into full effect after an 18-month grace period to allow lenders to update their systems, but some may adopt the new methods earlier.
