A guide to Malaysia’s new Hire Purchase (Amendment) Bill 2025
Malaysia is moving toward fairer and more transparent car financing. Parliament passed the Hire Purchase (Amendment) Act 2025, which abolishes the long‑standing Rule of 78 and flat‑rate interest calculations for fixed‑rate hire purchase loans. These changes are set to take effect for new car loans from January 1, 2027.
The goal is to modernise how car loan interest is calculated and give borrowers a clearer, fairer understanding of what they actually pay over time. Under the new rules, lenders must use the reducing balance method (also known as the effective interest rate, EIR).
Consumer groups and financial experts broadly welcome the reform as it enhances transparency and removes a practice that historically favoured lenders over borrowers.
Old system vs new system under the Hire Purchase (Amendment) Bill 2025
| Feature | Old system (Rule of 78 / Flat-rate) | New system (Reducing balance / EIR) |
| Interest calculation | Based on total principal or front-loaded with Rule of 78 | Calculated on remaining loan balance each month |
| Early repayment | Savings minimal; interest already front-loaded | Savings significant; less interest accrues as principal decreases |
| Total interest cost | Higher over loan tenure | Lower than flat-rate for same loan amount and tenure |
| Transparency | Harder to estimate actual cost | Clear effective interest rate (EIR) disclosed |
| Fairness | Favours lender; early settlement less beneficial | Favours borrower; interest reflects true outstanding balance |
| Loan start | Applies to most loans pre-2027 | Applies to all new loans from Jan 1, 2027 |
What the old system meant: Flat rate and the Rule of 78
Until now, most car loans in Malaysia used either:
- Flat‑rate interest — interest is charged on the original principal amount for the entire loan tenure, regardless of how much has already been repaid.
- Rule of 78 — an interest formula that front‑loads interest payments, meaning the borrower pays more interest in early instalments and less later on, even though monthly repayments remain the same.
Because a larger share of early instalments goes toward interest rather than principal, these systems offered little benefit when settling a loan early. Even after years of paying monthly instalments, borrowers often found that a large portion of their payments had gone toward interest rather than reducing the principal amount.
Under the old system, early settlement did not always translate to meaningful interest savings, which many consumer advocates described as unfair. Some banks even charged settlement fees for settling loans early.
How the reducing balance method works and why it benefits car owners
The reducing balance method calculates interest each month on the remaining loan balance rather than the original principal amount.
For example, if you borrowed RM100,000, interest in the first month is calculated based on RM100,000. As you pay down the principal, interest in subsequent months is calculated on a declining balance. This means:
- You pay less interest over the life of the loan than under flat‑rate or Rule of 78 systems.
- Early repayment becomes more financially beneficial because interest continues to decrease as principal is reduced.
- Loan cost comparisons between lenders become clearer because the effective interest rate (EIR) must be disclosed and represents the true cost of borrowing.
Consumer groups have pointed out that this approach makes loan repayment more equitable, especially for borrowers who pay off their loans early or take shorter loan terms.
What the new hire purchase rules mean for existing loans
The new rules apply primarily to new hire purchase agreements starting in 2027. However, the banking industry has introduced a “goodwill discount” initiative for borrowers with existing fixed‑rate loans using the Rule of 78.
Under this initiative, customers who choose to settle their loan early may be eligible for a discount on the remaining amount due. The discount is designed to make early settlement more financially rewarding under the old system, bringing it closer in effect to the fairness of the reducing balance approach.
Eligibility for the discount generally requires:
- Your loan uses the Rule of 78 or is a fixed‑rate hire purchase loan.
- You settle the loan early — before the original maturity date.
- Your account is in good standing (for example, not in arrears or under legal action).
Each bank sets its own criteria and calculation method for the goodwill discount. Borrowers should contact their lender to understand specific offer details.
This transitional measure recognises the reality that many Malaysians still have older loans, and it ensures they are not unfairly disadvantaged as the law changes.
How the changes affect new car loans from 2027
From January 1, 2027, all new car loans must use the reducing balance method, and lenders are required to clearly disclose the EIR during marketing and before loan signing.
This shift benefits borrowers in several ways:
- Interest reflects what you actually owe at each point in the loan, not a predetermined amount.
- Early loan settlement becomes more cost‑effective because interest is tied to the remaining principal.
- Loan comparisons are easier because the EIR shows the real financing cost.
- Borrowers can plan finances with greater clarity, knowing how interest accumulates over time.
Banks and analysts expect these reforms to influence car‑buying behaviour. Some foresee a shift toward shorter loan tenures and possibly higher down payments as lenders adapt to preserving margins under the reducing balance framework.
Practical tips for car buyers and current loan holders
If you have an existing car loan (pre‑2027):
- Review whether your loan uses the Rule of 78 or flat‑rate method.
- Speak to your bank about goodwill discounts for early settlement.
- Compare the potential savings from settling early versus continuing with monthly payments.
If you plan to buy a car soon:
- Expect lenders to quote loans using reducing balance interest from 2027.
- Compare EIR across loan offers rather than advertised flat rates.
- Factor in how early repayment or higher down payments could reduce total interest cost.
These changes mark a significant milestone in Malaysia’s car financing landscape, shifting toward fairness and transparency that benefits consumers in the long term.
Final thoughts on the new hire purchase reform
Malaysia’s reform of the Hire Purchase Act represents one of the most meaningful updates to car loan rules in years. By eliminating the Rule of 78 and flat‑rate interest for new loans, the law ensures that interest reflects the true cost of borrowing. Meanwhile, existing borrowers are supported through goodwill discount measures that make early settlement more worthwhile.
Whether you are finishing your current loan, refinancing, or buying a new car after 2027, understanding how interest is calculated will help you make better financial decisions and potentially save thousands over the life of your loan.
Finance your next car purchase with Carro’s Genie
With the upcoming changes in hire purchase law, understanding interest and repayment is more important than ever. Genie makes car financing simple and transparent, offering loans that follow the fair reducing balance method. Whether you’re buying a new car or refinancing an existing loan, Genie lets you see monthly payments clearly, total interest cost, and early settlement benefits, so you can make informed decisions.
Start your application with Genie today and take control of your car financing without surprises.
FAQs: Malaysia’s Hire-Purchase (Amendment) Bill 2025
Q: What is the Rule of 78?
A: The Rule of 78 is an interest calculation method used in some hire purchase loans where more interest is charged in the early years of the loan. This often makes early repayment less financially beneficial.
Q: What is flat-rate interest?
A: Flat-rate interest is calculated on the total loan amount for the full tenure, regardless of how much you have already repaid. It usually results in higher total interest compared to a reducing balance loan.
Q: What is the reducing balance method (EIR)?
A: Reducing balance calculates interest based on the remaining principal each month. As you repay the loan, interest decreases, making early repayment more financially advantageous.
Q: When will these new rules take effect?
A: The abolishment of Rule of 78 and flat-rate interest applies to all new car loans starting January 1, 2027.
Q: How does this affect existing loans?
A: Banks are offering goodwill discounts for early settlement on loans using the Rule of 78 or flat-rate method. This allows borrowers to save on interest if they settle early. Contact your bank to check eligibility.
