Buying a car in Malaysia just got a major update. On 1 June 2026, the new law known as the Hire-Purchase (Amendment) Act 2026 officially took effect. This amendment introduces changes to the calculation structure and car loan procedures across the industry. If you are planning to buy a car or are currently paying off a car loan, here is a summary of the new provisions under the Act.
The Big Shift: System Transition from Flat Rate to Reducing Balance
The biggest change is how banks calculate your loan interest. The old system using the flat rate is no longer being applied. Now, banks use the reducing balance method and the Effective Interest Rate (EIR).
To understand why this matters, think of your car loan like a melting block of ice:
- Old System (Flat Rate): If you borrowed RM80,000, the bank calculated your interest based on that full RM80,000 every single month. Even if you had already paid back half of the loan, you were still paying interest on the original amount you borrowed on day one.
- New System (Reducing Balance): Now, you only pay interest on the outstanding debt balance. The smaller your car debt, the less interest you have to pay.
| Feature | Old System | New System (2026 Act) |
| Interest Calculation | Charged on the full original loan amount until payment is completed | Charged only on the remaining principal balance you still owe |
| Cost Transparency | Advertised as a flat rate based on the original loan amount | Advertised as the Effective Interest Rate (EIR) to show true costs |
| Early Settlement | Small discount because interest was charged earlier at the start (frontloaded) | Interest charges stop as soon as the debt is fully paid |
3 Other Key Highlights You Should Know
- Clearer Upfront Costs with EIR and Loan Schedules
Banks are now required to show the Effective Interest Rate (EIR) alongside the loan repayment schedule.
What is EIR?
Previously, financial institutions displayed a flat rate (for example 3%) calculated based on the original loan amount. The Effective Interest Rate (EIR) is the annual interest rate calculated based on the borrower’s current outstanding balance.
Example:
- 3% flat rate = 5.5% EIR (for a 9-year financing tenure)
- 3% flat rate = 5.64% EIR (for a 5-year financing tenure)
Using this EIR indicator allows buyers to make direct financing cost comparisons between financial institutions.
What is a Loan Schedule?
This is your monthly payment schedule. If you pay RM1,000 a month, this schedule shows exactly how much of that money goes to your car debt and how much goes to the bank’s profit. You can see your actual debt shrinking every month.
- Capped Maximum Interest Rates
The government has set strict maximum limits on how much interest lenders can charge. While both options now use the reducing balance method, they work differently based on your risk preference:
- Fixed Rate Loans: The interest rate remains the same from the beginning until the loan is fully paid. The highest limit banks can charge is 17% EIR per year (for loans up to 5 years) and 16% EIR for longer loans. Your monthly payment will be the same every month without any surprises.
- Variable Rate Loans: The interest rate for this loan follows the Reference Rate set by Bank Negara Malaysia and can change from time to time throughout your loan tenure. However, this rate will not exceed the maximum limit of 17% EIR per year regardless of the loan tenure. This means your monthly payment can go up or down according to the Reference Rate movements without any guarantee of which direction it will move but it is protected from exceeding the set ceiling.
- Digital Signatures and Faster Paperwork
Depending on your chosen financing provider, hire-purchase agreements may now be signed digitally or electronically. For financial institutions that provide this facility along with the option of receiving documents via email, it can reduce the use of physical documents and speed up dealings at the car dealership.
Is It Still Worth Doing an Early Settlement Now?
Under the previous system, the savings from early settlement were quite limited because a large portion of the interest charges had been applied in the earliest years of the loan. Under the new reducing balance system, early settlement can provide much greater financial benefits.
Pros of EIR Compared to Rule 78
- Fairer Interest Rebates: Under the EIR method, interest is calculated according to the actual loan balance. If you settle early, the interest rebate you receive reflects the true balance. This situation is different from Rule 78 which gives a smaller rebate because interest is distributed more heavily at the beginning of the term.
- More Transparent Interest Costs: EIR is a standardized disclosure method that allows you to compare loan offers between banks fairly as opposed to the flat rate under Rule 78 which makes it difficult to determine true costs.
- No Formula Penalty Effects: Because the interest is tied directly to the debt balance, you will not be penalized by the calculation structure as happened under Rule 78 if you choose to settle the loan earlier.
Cons of EIR Compared to Rule 78
- Rate Numbers Look Higher: The EIR figure is mathematically higher than the previously used flat rate even though the actual monthly payment amount does not change. This can lead to a false impression that the loan has become more expensive.
- Need to Understand the New Method: Consumers need to get used to comparing offers using the EIR percentage because they can no longer be directly compared to the flat rate commonly used under Rule 78.
What If You Already Have a Loan?
If you signed your car loan agreement before 1 June 2026, this new law does not automatically apply to you. Your existing loan will continue under the old flat rate system.
An initiative by major banking associations (ABM, AIBIM and ADFIM) has agreed to offer goodwill discounts to existing borrowers who want to settle their old loans early. This goodwill discount aims to balance your final loan balance so that it is more aligned with the reducing balance system calculation structure. However, the granting of this goodwill discount is subject entirely to the absolute discretion of the financier. You can contact your financing provider for further confirmation and a quotation.
Pro Tips for Car Buyers in 2026
- Ask about the EIR: Do not just ask about the monthly installment. Make sure you ask the car dealer or bank to provide the actual EIR percentage so you are not misled and can compare properly.
- Check the System Transition: The government set a transition period until 31 March 2027 for financing providers to update their systems. By 1 April 2027, all financing providers including bank and non-bank financial institutions are required to fully use the Effective Interest Rate system for hire-purchase. At this time, the availability of this new system depends on the readiness of the respective financiers. Therefore, you are advised to check whether your chosen provider has made this system transition before signing the agreement.
Why You Should Choose CARSOME For Your Next Car Purchase
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