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From 1 June 2026, new hire-purchase agreements in Malaysia can no longer be written on a flat rate. The Hire Purchase (Amendment) Act 2026 abolished the flat-rate structure and the Rule of 78 for new agreements and replaced them with reducing balance and a disclosed Effective Interest Rate.
Two things about this reform are widely repeated and wrong: that nothing binds until 2027, and that a higher EIR means a worse deal. Both are addressed below, along with the statutory ceilings that almost nobody quotes.
Prefer Bahasa Malaysia? Peraturan Baru Loan Kereta 2026
| Before | New agreements | |
|---|---|---|
| How interest is charged | A flat rate on the full original amount, for the whole tenure | On the balance you still owe, which falls each month |
| The number you compare | A flat rate, which looks low | A disclosed Effective Interest Rate |
| Settling early | The Rule of 78 front-loaded interest, so the balance stayed high early on | The balance follows the amortisation schedule |
| Maximum charge | Under the 2005 regulations | Capped on an EIR basis by P.U. (A) 171/2026 |
The practical instruction for anyone buying a car right now is short: do not compare a flat-rate percentage against an EIR percentage. Ask for the total amount repayable, the monthly instalment, and which method the quotation uses.
Act A1783 received royal assent on 20 January 2026, was gazetted on 30 January 2026, and came into operation on 1 June 2026 under P.U. (B) 81/2026. The Hire-Purchase (Terms Charges) Regulations 2026 commenced on the same date and revoked the 2005 regulations they replaced.
It covers the goods listed in the First Schedule to the Hire Purchase Act 1967 — which includes motorcycles, with no engine-capacity or price qualification attached. If you are financing a motorcycle rather than a car, the same method change applies to you.
The 2027 date does not mean the law waits until 2027
The industry window running to 31 March 2027 is an administrative forbearance announced by KPDN and published by Bank Negara Malaysia. It gives providers time to update systems and documents. It is not in the Act: A1783's only transitional provision concerns proceedings already pending, and the terms-charge regulations commenced with no grace period, so the ceilings bind throughout. What the window explains is why a quotation issued today may still be expressed the old way — not why the law is not yet in force.
Under a flat rate, the total interest is worked out from the full original financing amount for the entire tenure, and then divided across the months. Repaying principal does not reduce the base the interest is calculated on.
Take an illustrative RM60,000 financed at 3% flat over five years. Total interest is RM60,000 × 3% × 5 = RM9,000, total repayable is RM69,000, and the monthly instalment is roughly RM1,150. By the final year you owe far less than RM60,000, but you are still paying interest calculated on RM60,000.
The Rule of 78 compounded the problem for anyone settling early. It allocated a disproportionate share of the total interest to the early months, so a borrower two years into a five-year agreement often found the settlement figure much higher than they expected from having made two years of payments. That is the specific unfairness the reform removes.
Interest each month is charged on the balance actually outstanding. Once part of the principal is repaid, the base for next month's interest is smaller.
On a separate illustration — RM60,000 at 5% EIR over five years, giving a level instalment of about RM1,132 — the first month carries roughly RM250 of interest and RM882 of principal; the second, roughly RM246 of interest and RM886 of principal. The payment does not change. The composition does.
You can run both methods against the same car in the car loan calculator, which defaults to reducing balance and keeps flat rate selectable for existing contracts.
Malaysian car buyers have spent years reading advertisements quoting 2.7%, 3% or 3.5%. Those were flat rates. When a lender now shows an EIR, the number looks worse even when the deal costs the same or less.
As a rough orientation, an EIR is roughly double the flat rate that produces the same cost. Do not conclude that a 5% EIR is more expensive than a 3% flat rate. Put five figures side by side instead:
The fourth is the one that settles arguments. Two offers with different rates and different tenures are only genuinely comparable at the total.
The reform is usually described only as a change of method. It also set statutory maximums, and they are the most actionable numbers in the whole package. For goods in the First Schedule to the Hire Purchase Act 1967, the Hire-Purchase (Terms Charges) Regulations 2026 cap terms charges at:
| Agreement | Maximum terms charge |
|---|---|
| Fixed rate, five years or less | 17% per year (EIR) |
| Fixed rate, more than five years | 16% per year (EIR) |
| Variable rate | 17% per year (EIR) |
These are ceilings, not typical rates — mainstream bank car financing sits far below them, and a quotation approaching these figures is telling you something about the product or about how you have been assessed. Separately, section 31(1) of the Act requires a minimum deposit of one-tenth of the cash price, so an offer of zero down payment on a hire-purchase agreement deserves a question about how it is structured.
Nothing changes automatically. An agreement signed before 1 June 2026 continues on its original terms, on the method it was written under, and those agreements will run for years yet.
Switching an existing agreement onto the new method is also not a one-sided right. Under section 57A(3) of the Hire Purchase Act 1967 as amended, the hirer and the owner must agree together to adopt the new method of calculating the net balance. You can ask; you cannot require.
Banks have separately announced goodwill discounts on early settlement through their industry association. That is an undertaking by the banks, not a statutory entitlement, and it affects the settlement amount rather than arriving as a cash payment. The figure is calculated by the lender when an eligible customer requests a settlement statement — so the practical step is to request one and read it.
The Hire Purchase (Amendment) Act 2026 [Act A1783] received royal assent on 20 January 2026, was gazetted on 30 January 2026, and came into operation on 1 June 2026 under P.U. (B) 81/2026. The Hire-Purchase (Terms Charges) Regulations 2026 [P.U. (A) 171/2026] commenced on the same date.
No, and this is the most commonly repeated error about the reform. The industry window running to 31 March 2027 is an administrative forbearance about providers updating their systems, announced by KPDN and published by Bank Negara Malaysia. It is not in the Act. Act A1783's only transitional provision concerns proceedings that were already pending, and the terms-charge regulations commenced with no grace period at all — so the statutory ceilings bind throughout that window. What the window explains is why a quotation issued today may still be expressed the old way, not why the law is not yet in force.
Yes. Motorcycles sit in the same First Schedule to the Hire Purchase Act 1967, with no engine-capacity or price qualification, so the same shift from flat rate to reducing balance applies. The financing amounts and deposits differ in practice, but the method does not.
Because they measure the same cost against different bases. A flat rate charges interest on the full original amount for the whole tenure, no matter how much you have repaid. An effective rate charges only on what you still owe. For the same total cost, the EIR figure is roughly double the flat one — so a 3% flat rate and a 3% EIR are very different loans, and comparing the two percentages directly is meaningless.
Not usually. On a fixed-rate reducing-balance loan the instalment stays level. What changes is the split inside it: the interest portion falls each month and the principal portion rises. The benefit is not a shrinking payment — it is that your outstanding balance falls in a way you can follow, which matters most if you settle early.
No. An agreement signed before the commencement date continues on its original terms. Switching an existing contract to the new method is also not a one-sided right of the borrower: under section 57A(3) of the Hire Purchase Act 1967 as amended, the hirer and the owner must agree together. Separately, banks have announced goodwill early-settlement discounts through their industry association, but the amount is calculated by the lender when an eligible customer requests a settlement figure — it is not a cash payment.
Yes, and it is worth knowing. For goods in the First Schedule to the Hire Purchase Act 1967, the Hire-Purchase (Terms Charges) Regulations 2026 set the maximum terms charges at 17% per year on an effective interest rate basis for a fixed-rate agreement of five years or less, 16% per year for a fixed-rate agreement longer than five years, and 17% per year for a variable-rate agreement. Separately, section 31(1) of the Act requires a minimum deposit of one-tenth of the cash price.
General educational guidance, not legal or financial advice. Commencement dates, ceilings, eligibility for goodwill discounts and financing terms can change and vary by provider. Read the official documents and your own quotation before deciding.