Malaysia’s car loan system is changing in June 2026, with banks moving away from the old “flat interest rate” method to a fairer system based on the remaining loan balance. Here’s what the new rules mean for car buyers and monthly repayments.
New car loan system rules
Starting June 1, 2026, Malaysia will introduce a new way of calculating car loan interest under the updated Hire-Purchase Act.
Banks will no longer use the old “flat interest rate” system that many Malaysians have been using for decades. Instead, all new hire purchase agreements will use the Effective Interest Rate (EIR) and reducing balance system, where interest is calculated based on the amount you still owe.
The current system
Under the current system, banks calculate interest based on the original loan amount for the entire loan period.
This means even after years of repayments, interest is still being charged as if you owe the full amount.
Imagine you borrow RM100,000 for a car with:
- 3% interest
- 9-year loan
Under the current flat-rate system:
- Interest is calculated using the full RM100,000
- Even after you’ve already repaid half the loan
On top of that, many car loans also use something called the Rule of 78, which affects how interest is split throughout the loan.
It is a method where you pay most of the interest in the early month and less interest in the later months.
- Early settlement doesn’t give big savings
- Interest is “front-loaded”
From flat rate to effective rate
Malaysia will switch to the reducing balance system.
This means:
- Interest is only charged on the remaining balance
- As your loan decreases, your interest also decreases
Example:
| Year | Starting Loan Balance (RM) | Amount Repaid That Year (RM) | Remaining Balance (RM) | Interest Charged Based on (RM) |
| 1 | 100,000 | 10,000 | 90,000 | 90,000 |
| 2 | 90,000 | 10,000 | 80,000 | 90,000 |
| 3 | 80,000 | 10,000 | 70,000 | 80,000 |
So instead of paying interest on RM100,000 for all the years, borrowers only pay interest based on what they still owe.
Goodwill discount for existing car loans
Car loans signed before 1 June 2026 will not automatically switch to the new system. However, banks will offer a goodwill discount (early settlement rebate) for borrowers who choose to settle their loan early after the new law takes effect.
This helps reduce part of the remaining interest, making early repayment more worthwhile than under the old Rule of 78 system.
The discount is not fixed and depends on your bank and loan balance. In some cases, borrowers may also negotiate to switch to the new reducing balance system, but this requires bank approval.
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