Last updated: 8 September 2026
Malaysian banks often advertise personal loans with a flat interest rate, but the effective interest rate (EIR) reflects the real cost, and it can be almost double the advertised flat rate. Bank Negara Malaysia (BNM) requires lenders to disclose the EIR for personal loans, and hire purchase financing is moving towards the same requirement under the Hire Purchase (Amendment) Act 2026.
The Difference Between Flat Rate And EIR
Until 31 December 2026, flat rate is still the standard way banks price personal loans in Malaysia. It gives you a fixed monthly instalment and is easy to advertise. That's why banks have stuck with it, even though it doesn't show you the real cost of borrowing the way EIR does.
Flat rate calculates interest on the original loan amount for the entire tenure, even as you pay it down every month. Borrow RM20,000 at a 5% flat rate over five years, and the bank charges 5% of RM20,000, which is RM1,000, every year for all five years, working out to a monthly instalment of RM416.67. That's still true in year four, even though you've repaid most of the loan by then.
The flat rate reaches that RM416.67 instalment by charging interest on the full RM20,000 every year. EIR is the rate that would produce the same RM416.67 instalment if interest were charged only on what you still owe each month.
Calculating EIR On A RM20,000 Personal Loan
Two banks offer you the same RM20,000 loan over five years, but at different flat rates. The table below shows what each one works out to in EIR.
| Loan Amount | Tenure | Flat Rate (% p.a.) | Total Interest | Monthly Instalment | EIR (% p.a.) |
| RM20,000 | 5 years | 4.50% | RM4,500 | RM408.33 | 8.29% |
| RM20,000 | 5 years | 6.50% | RM6,500 | RM441.67 | 11.68% |
The flat rates differ by 2 percentage points, but their EIRs differ by about 3.39 percentage points. The 6.5% loan also costs RM2,000 more in total interest over five years, for a monthly instalment that's only about RM33 higher.
It also doesn't account for any fees on the loan. Either way, you don't need to work this out yourself. Lenders must show you the exact EIR in your loan documents.
How Tenure Affects Your EIR
Take the same RM20,000 loan at a 5% flat rate, and stretch it across four different tenures.
| Tenure | Total Interest | Monthly Instalment | EIR (% p.a.) |
| 2 years | RM2,000 | RM916.67 | 9.32% |
| 3 years | RM3,000 | RM638.89 | 9.31% |
| 5 years | RM5,000 | RM416.67 | 9.15% |
| 7 years | RM7,000 | RM321.43 | 8.97% |
The EIR barely moves. It runs from 9.32% at two years down to 8.97% at seven years. The total interest is what actually changes, RM2,000 over two years versus RM7,000 over seven, because every extra year adds another RM1,000 of interest on the same RM20,000 at 5%.
How A Processing Fee Raises Your EIR
Suppose that same RM20,000 loan at a 5% flat rate over five years comes with a RM600 processing fee. If the fee is deducted before the money reaches you, you receive only RM19,400. But your monthly instalments are still calculated on the full RM20,000. Once you include the RM600 fee, the EIR rises from about 9.15% to about10.47%.
Other costs added to the loan, like credit protection insurance that covers your instalments if you die, become disabled, or lose your job, can push the EIR higher still.
Where To Check The EIR On Your Loan Offer
Lenders must show you the EIR. You'll find it in the loan's Product Disclosure Sheet (PDS), printed next to the flat rate, and again in the formal letter of offer once you're approved. It's labelled "Effective Interest Rate" or "EIR" for conventional loans, and "Effective Profit Rate" or "EPR" for Islamic financing. Both are shown as a percentage per year.
If a lender only tells you the flat rate, ask for the PDS before you sign anything. Banks are required to provide it. When you're comparing offers from different banks, check the EIR in each PDS rather than the advertised flat rates.
BNM's Personal Financing Policy Document will ban flat rate calculations for new personal financing once its remaining provisions take effect on 1 January 2027. Lenders will have to move to reducing-balance pricing instead, where interest is calculated on what you still owe each month, not the original loan amount. RinggitPlus will follow BNM's changes and compare personal loan EIRs across banks, so you can see the real cost side by side before you apply. Car loans are moving to the same reducing-balance pricing on a separate timeline, covered in the FAQ below.
Frequently Asked Questions
Does EIR Apply To Car Loans Too?
Yes. Car loans, or hire purchase financing, have also used flat rate pricing, and the flat rate you see advertised understates the real cost the same way it does on a personal loan. Under the Hire Purchase (Amendment) Act 2026, which started on 1 June 2026, new car loans are moving towards reducing-balance pricing. Financing providers have until 31 March 2027 to complete the required system changes.
Does EIR Change How Much I Pay Each Month?
No. Your monthly instalment is based on the flat rate calculation the bank uses to build your repayment schedule. EIR doesn't change this instalment. It shows you the real yearly cost of the loan.
Does Settling My Loan Early Reduce The EIR?
No. The EIR quoted to you is fixed when you take the loan, based on the agreed loan amount, tenure and fees. Settling early may reduce the total interest you pay overall, but it doesn't change the EIR you were quoted. On most flat rate personal loans today, the early settlement rebate follows the Rule of 78, so the rebate you get is smaller than it would be under reducing-balance pricing. BNM is banning the Rule of 78 alongside flat rate pricing from 2027. Ask your bank about early settlement charges before deciding.
