The 2026 Car Loan Guide: Navigating the New Hire Purchase Reform
For decades, car loans in Malaysia were governed by a calculation method that many experts called "unfair" to the borrower. But as of early 2026, the Hire Purchase (Amendment) Act 2025 has officially overhauled the system. If you are buying a car today, you are entering a market that is more transparent, fairer, and rewards those who pay off their debts early.
The Great Shift: Before vs. After
The core of this reform is the total abolition of the "Rule of 78" and the "flat rate" interest method for all new hire-purchase agreements.
Before 2026: The Front-Loaded Trap In the old system, banks used a "flat rate" to calculate your total interest. Even if you owed only RM1,000 left on a RM60,000 loan, you were still paying interest as if you owed the full RM60,000. To see this effect for yourself, you can use our Car Loan Calculator to compare the old flat-rate method with the new reducing balance one. In the old system, the Rule of 78 "front-loaded" that interest.
In the first year of your loan, up to 80% of your monthly payment might have gone toward interest, not the principal. This is why many Malaysians were shocked to find that after three years of paying for a car, their outstanding balance had barely moved. Early settlement gave almost zero savings because the bank had already collected most of the profit upfront.
Now (2026): The Reducing Balance Era As of 2026, all new car loans must use the reducing balance method. This is the same system used for housing loans and is considered the global gold standard for fairness.
Interest is now calculated only on what you still owe. As you pay down your loan, your interest charges drop proportionally. This means that if you choose to settle your loan in Year 3 instead of Year 9, you will receive a massive interest rebate that actually reflects your early payment (you can see the effects of early settlements and extra payments here).
Why Transparency is the New Standard
In 2026, you will no longer see "misleadingly low" flat rates in car advertisements. Lenders are now legally required to disclose the Effective Interest Rate (EIR).
- Before: A salesman might quote you "2.5%," but the real cost (EIR) was closer to 5%.
- Now: The 5% EIR must be displayed clearly, allowing you to compare loan offers "apples-to-apples" across different banks.
What If You Already Have a Loan?
If you signed your car loan before 2026, you aren't completely left behind. While the new law primarily covers new contracts, many Malaysian banks have launched goodwill discount programs. These programs offer settlement rebates that mimic the new reducing balance math, even for older "Rule of 78" loans.