22nd September 2026 - 3 min read
Fourteen of the 20 banks offering hire-purchase financing have moved car loans from the Rule of 78 to the reducing balance method, Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said.
The switch was required from 1 June 2026, and the remaining six banks are expected to finish by 31 December 2026. None of the 14 have been named publicly yet.
Before 1 June 2026, most car loans used a flat rate combined with the Rule of 78. Under that system, interest was charged on the full original loan amount for the entire tenure, even as you paid it down, and most of that interest was charged in the early years. Settling early got you a rebate on interest you hadn’t used yet, but it was smaller than most people expected, since so much interest had already been front-loaded.
This only applies to new loans signed after a lender made the switch. If your loan was signed before that, it stays on the old terms for the rest of its life, this doesn’t change automatically.
The reducing balance method charges interest only on what you still owe. Bank Negara Malaysia’s own example: borrow RM100,000 over nine years, and a 3% flat rate produces the same RM1,175.93 monthly instalment and RM27,000 total interest as a 5.5% reducing-balance rate. A lower reducing-balance rate of 5% instead brings the instalment down to RM1,151.76 and the total interest to RM24,390, a real saving of RM2,610 over the loan.
Once a bank switches, the rate it quotes you will look higher on paper, even though nothing has gotten more expensive. A 3% flat rate and a 5.5% reducing-balance rate cost exactly the same.
Always ask for the effective interest rate, or EIR, since that’s now the only rate that lets you compare loans properly.
There are 429 lenders registered with the Association of Hire Purchase Companies Malaysia, made up of the 20 banks plus around 409 standalone hire-purchase companies.
The ministry’s target is for 80% of hire-purchase providers to switch by the end of this year. Everyone has until 1 April 2027 to fully comply, with a grace period running until 31 March 2027.
If you’re taking out a new car loan, ask the bank directly whether it’s on the reducing balance method yet, since the 14 haven’t been named. Always compare offers using the EIR, not the quoted flat rate.
If you already have a car loan, nothing changes on its own. Your loan keeps its original terms. But banks have agreed to offer a goodwill discount if you settle early, ask your bank for an early settlement quotation to see what that discount would be.
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Iman writes about personal finance with curiosity. She is interested in the stories behind money, the hesitation around big decisions, and the small habits that shape financial futures. Off the clock, she is either dissecting a film or climbing her way up the leaderboard in her favourite games.
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