The Hire-Purchase (Amendment) Act 2026 is an amendment to the Hire-Purchase Act 1967 (Act 212). It was gazetted on 30 January 2026 and comes into force on 1 June 2026. The biggest change: how car loan interest is calculated.
No need to read everything. Jump to the section you need using the list above — each one is short, with a table and an example.
- 🚗 Prospective car buyers who want to know the real cost after 1 June 2026
- 📄 Existing loan holders worried that their instalment will change
- 💸 Anyone planning to settle their loan early
Quick summary
In one table — what differs between old agreements and new agreements:
| Aspect | Before (old) | After (new) |
|---|---|---|
| Interest calculation | Flat rate on the original principal | Reducing balance (EIR) |
| Rule of 78 | Used | Abolished |
| EIR disclosure | Not required | Required |
| Early settlement | Smaller rebate | Fairer |
| Existing loans | Original terms retained — instalment does NOT change | |
What changes on 1 June 2026
Previously, interest was calculated on the flat rate — charged on the entire original principal for the whole tenure, regardless of how much you had already paid.
From 1 June 2026, for new agreements, interest must be calculated on the reducing balance:
- 📉 Interest only accrues on the principal that is still outstanding
- ✅ Once the balance is paid off, no further interest is charged
- 🔍 Banks must disclose the EIR — you see the true cost, not a marketing figure
Flat rate vs EIR — why they differ
The flat rate looks low because it is calculated on the full original principal. The EIR (effective rate) follows the actual balance — that is the true cost of your loan.
// Same rate, two different numbers
For a ~9-year tenure, the EIR is roughly 1.8× the flat rate. This ratio varies with tenure — our calculator computes the real EIR for every scenario.
| Amount financed | RM 45,000 |
| Total interest (flat rate) | RM 14,175 |
| Total payable | RM 59,175 |
| Monthly instalment | RM 547.92 |
| Flat rate (advertised) | 3.50% |
| Real EIR | ≈ 6.34% |
Rule of 78 vs reducing balance
The Rule of 78 is an old method that splits interest in a front-loaded manner — you pay more interest in the early years. As a result, settling early gives a smaller rebate than it should.
| Aspect | Rule of 78 (old) | Reducing balance (new) |
|---|---|---|
| Interest distribution | Front-loaded (heavy early on) | Tracks the actual balance |
| Effect on early settlement | Smaller rebate | A more equitable saving |
| Status after 1 June 2026 | Abolished (new agreements) | Mandatory method |
In general, the difference is most pronounced in the middle of the tenure and shrinks towards the end.
New loans vs existing loans
The new rules apply only to agreements signed on or after 1 June 2026.
| New (≥ 1 June 2026) | Existing (< 1 June 2026) | |
|---|---|---|
| Interest method | Reducing balance / EIR | Original terms retained |
| Monthly instalment | Follows the new method | Does NOT change |
| Early settlement | Fairer | Voluntary goodwill discount (if eligible) |
Timeline & transition period
There is a transition period until 31 March 2027. During this period, some banks may still issue flat-rate financing while they upgrade their systems.
// Hire-Purchase (Amendment) Act 2026 timeline
Early settlement is now fairer
Because interest now follows the reducing balance, settling early should be more worthwhile than under the Rule of 78.
Interest rate caps under BNM guidelines
Under Bank Negara Malaysia (BNM) guidelines, there are effective interest rate caps:
| Loan type | Tenure | EIR cap / year |
|---|---|---|
| Fixed rate | ≤ 5 years | 17% |
| Fixed rate | > 5 years | 16% |
| Variable rate | All tenures | 17% |
- ⏳ Maximum loan tenure: 9 years (108 months)
- 💰 Usual minimum deposit: 10% (margin up to 90% for new cars)
What you should do
- 01
Focus on the EIR
Not just the flat rate — the EIR is the true cost of your loan.
- 02
Compare several banks
Rates, margins and EIRs differ between banks. Compare before you commit.
- 03
Confirm with the bank
Ask the calculation method (flat rate or reducing balance) + eligibility when you apply.
- 04
If you want to settle early
Request an official settlement quote from your bank for the exact figure.
FAQ
Is the Rule of 78 still used for car loans in Malaysia?
No. Since 1 June 2026, the Hire-Purchase (Amendment) Act 2026 abolishes the Rule of 78 and the flat rate for new agreements. New agreements now use the reducing balance method and the effective interest rate (EIR). Existing agreements signed before 1 June 2026 retain their original terms.
Will my existing loan instalment drop after the 2026 Act?
No. The new Act applies only to agreements signed on or after 1 June 2026. Your existing loan's monthly instalment does not change. What is offered to existing borrowers is a voluntary goodwill discount if you settle early — confirm this with your bank.
What is the difference between the flat rate and the effective rate (EIR)?
The flat rate charges interest on the entire original principal for the whole tenure, so it looks low but understates the true cost. The EIR (effective rate) follows the reducing balance — interest only on the outstanding balance. A rough estimate is EIR ≈ 1.8 times the flat rate for a 9-year tenure (e.g. 3.5% flat ≈ 6.3% EIR); this ratio varies with tenure.
What is the maximum tenure for a car loan in Malaysia?
The maximum tenure for a car hire-purchase loan in Malaysia is 9 years (108 months). Typical tenures range from 5 to 9 years. A longer tenure lowers the monthly instalment but increases the total interest you pay.
🧮 Work out your real instalment — flat rate + EIR
Complete with road tax, DSR eligibility & a bank comparison, in line with the Hire-Purchase (Amendment) Act 2026.
Open the Car Loan Calculator →// KiraLoan · reviewed vs BNM/KPDN guidelines · not financial advice