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What is changing for car loans in 2026

For decades, Malaysian car loans (legally, hire-purchase financing under the Hire-Purchase Act 1967) have been quoted using a flat interest rate. The Hire Purchase (Amendment) Act 2026 changes that. It was gazetted on 30 January 2026 and came into force on 1 June 2026, and it is administered by the Ministry of Domestic Trade and Cost of Living (KPDN).

The law abolishes both the flat interest rate and the Rule of 78 early-settlement method for new hire-purchase financing, replacing them with a reducing-balance method and mandatory effective interest rate (EIR) disclosure so borrowers can see the true cost. Banks have a transition window to 31 March 2027 to upgrade their systems — during that window some new financing may still be booked on the old flat-rate basis, so it is worth asking which method a quote uses.

Flat rate vs reducing balance: how each charges interest

The difference is entirely about what the interest is charged on.

• Flat rate: interest is calculated on the full original loan amount for every month of the tenure, then added up front and split into equal instalments. You keep paying interest on the whole amount even as your balance falls.
• Reducing balance: interest is charged only on the outstanding balance each month, like a home loan. As you pay down principal, the interest portion of each instalment shrinks. This is the method new hire-purchase financing moves to.

Why a 3% flat rate is really about 5.5%

Because a flat rate charges interest on money you have already repaid, the advertised rate understates the true cost. To compare it fairly with a reducing-balance product, you convert it to an effective interest rate (EIR) — the rate a reducing-balance loan would need to produce the same instalments.

For a typical car loan, the EIR is roughly 1.8–1.9× the flat rate. A 3% flat rate over seven years works out to about 5.5% effective. That is why the 2026 reform centres on EIR disclosure: the same headline rate means very different things under the two methods, and the EIR is the apples-to-apples number you should compare.

Worked example: RM100,000 over 7 years at 3%

Take a RM100,000 loan over 84 months (7 years) at a 3% annual rate, and compare the two methods at that same headline rate.

Under the flat rate, total interest is RM100,000 × 0.03 × 7 = RM21,000, the monthly instalment is (100,000 + 21,000) ÷ 84 ≈ RM1,440.48, and the effective rate works out to about 5.57%. Under reducing balance, the instalment is about RM1,321.33, total interest is about RM10,992, and the effective rate is essentially the headline 3%.

Same 3% on the poster, but the flat method charges roughly RM21,000 in interest against about RM11,000 under reducing balance — close to double. That gap, multiplied across the car-loan market, is what the reform is designed to close. Run your own figures in the car loan calculator to see the difference for your amount and tenure.

Buying a car during the transition (June 2026 – March 2027)

Because banks have until 31 March 2027 to switch their systems, the method you are offered during this window can vary by lender. This is market practice during the transition, not a fixed rule for every loan.

Two practical habits: ask whether a quote is flat rate or reducing balance, and compare every offer on its effective interest rate (EIR) rather than the headline rate. A lower-looking flat rate at one bank can be more expensive than a slightly higher reducing-balance rate at another.

Already have a flat-rate car loan?

Existing borrowers stay on their existing contract terms — the new law applies to new financing. But from 1 June 2026, banks offer goodwill discounts to eligible borrowers who settle an existing flat-rate (Rule of 78) hire-purchase loan early, bringing the outstanding balance closer to what it would have been under reducing balance. Eligibility typically requires that the account is not seriously in arrears and not under legal action or restructuring.

If you are weighing an early settlement on an older loan, use the Loan Early Settlement (Rule of 78) calculator to estimate the rebate, then ask your bank for a written settlement quotation — that quotation, including any goodwill discount, is the authoritative figure.

How a car loan affects your DSR

Whichever method applies, a car loan instalment is one of the heaviest fixed commitments a bank counts in your debt-service ratio (DSR). A larger instalment eats more of your income and leaves less room for a home loan or other financing.

The reducing-balance method does not change your monthly instalment versus a flat rate at the same effective rate — but comparing offers on EIR helps you pick the genuinely cheaper loan, and a smaller instalment is a smaller drag on your DSR. Use the DSR calculator to see how a planned car instalment changes your ratio before you commit.