Malaysia Scraps Rule of 78, Car Loan Savings Ahead - Analysts

Car buyers are set to save more with the Hire-Purchase (Amendment) Bill 2025, which removes the long-criticized Rule of 78 and flat-rate interest for fixed-rate loans. 

Approved by the Dewan Rakyat on Oct 8, the law introduces a reducing balance system and effective interest rate (EIR), making loan costs more transparent.

Under the old system, most interest was front-loaded, leaving early settlements almost pointless. Now, borrowers pay interest only on what’s left of the loan, meaning early repayment and shorter terms offer real savings.

“This is a more equitable and transparent model that better reflects borrowing costs,” said BIMB Securities in a NST report, which noted lenders must now disclose the true interest rate.

Economist Assoc Prof Dr Ida Yasin said the change brings Malaysia in line with global standards. 

“With the reducing balance system, interest is only calculated on what you still owe, which is a more accurate reflection of your debt,” she said in a The Star report.

Economist Prof Emeritus Dr Barjoyai Bardai echoed the statement saying that the reform could also encourage shorter loans and make car ownership feel more affordable. 

“Borrowers will have more incentive to take shorter loan terms and repay early. For used-car buyers, whose loans are typically shorter, this makes a meaningful difference,” he told the daily news portal.

The bill caps fixed-rate loans at 17% per year for five years or less, and 16% for longer terms, with variable rates staying at 17%. 

Banks and finance companies have an 18-month transition period to adjust systems, though some lawmakers are pushing to shorten it. Minister of Domestic Trade and Cost of Living Datuk Armizan Mohd Ali stressed the changes are part of a broader push for transparency and consumer protection. 

“The main goal is to create a fairer and more transparent consumer credit environment,” he noted, marking a major step forward for Malaysian borrowers.