No More Flat-Rate Car Loans: Why 3% Really Means About 5.5%, and What the New Hire Purchase Rules Mean for You

The short answer: the Hire Purchase (Amendment) Act 2026 took effect on 1 June 2026. New car loans no longer use flat rates and the Rule of 78; interest is calculated on the outstanding principal (reducing balance), and lenders must disclose the effective interest rate (EIR). The headline change for buyers: the old advertised "3%" actually costs about 5.5% a year.

What changed

According to paultan in September:

• 14 of 20 banks already offer the new method, and the other six must switch by 31 December;
• other hire purchase providers have until 31 March 2027.

If you're buying a car before year-end, ask before signing: is this loan on the new method?

Worked example: what does 3% flat really cost?

Say you borrow RM80,000 over nine years (108 months) at a 3% flat rate:

• Total interest: RM80,000 × 3% × 9 = RM21,600
• Monthly instalment: (RM80,000 + RM21,600) ÷ 108 = RM940.74
• Equivalent effective rate on a reducing balance: about 5.5% a year

That's why the law now requires the EIR. A 3% headline sounds cheap, but you're paying interest equivalent to a 5.5% loan.

These figures are JomGuide's illustrative calculation; your loan documents are what count.

How much does settling early save?

RinggitPlus notes that over the full term, total interest is roughly the same under both methods; the difference shows up when you settle early.

Using the example above, settling in full after three years:

Honestly, that's not a huge gap. What really drives your interest cost is the EIR and the loan tenure. The bigger benefit of the new law is that you can now compare banks on the same measure.

What to compare when buying

JomGuide's advice: compare EIRs, not monthly instalments. The JomGuide team is still paying off a car loan too, and it's easy to be drawn in by a low instalment that only looks low because the tenure has been stretched.

Ask the bank or dealer four questions before you sign:

1. What's the EIR? Compare EIRs across banks, not flat rates.
2. Is this a reducing-balance loan?
3. Can I see the full repayment schedule? It shows how much of each instalment is principal and how much is interest.
4. Would a shorter tenure get a better rate? The longer the tenure, the more interest you pay overall.

Already have an older car loan?

• Existing loans don't switch automatically.
• If you want to settle early, ask your bank for a settlement quotation. Member banks of ABM, AIBIM and ADFIM may offer a goodwill discount, set by each bank, so ask for it to be shown in the quote.

JomGuide's advice: build your emergency fund before paying off a car loan early. Car loan rates are usually modest, and emptying your savings into one can leave you borrowing at a far higher rate if something comes up.

FAQ

When did the new law take effect?

1 June 2026. Some banks and providers are still transitioning, with deadlines of 31 December 2026 and 31 March 2027.

Will my existing loan switch to the new method?

No. If you want to settle early, ask your bank for a quotation and about a goodwill discount.

Will instalments be cheaper under the new method?

Not necessarily. Over the full term, total interest is about the same. Compare EIRs.

How do I convert a flat rate to an EIR?

There's no simple multiplier; it depends on the tenure. For a nine-year loan, 3% flat is roughly 5.5% EIR.

This is general information, not financial advice.