Vehicle borrowers in Malaysia now have the opportunity to enjoy greater savings when making loan payments early.
The initiative was implemented after the government reviewed plans to abolish the ‘Rule of 78’ method, which has been considered unfair to consumers.
The abolition of this method, contained in the Hire Purchase Act Amendment Bill 2025, will end the use of the ‘flat-rate’ interest rate system and replace it with a ‘reducing-balance’ system.
According to an analysis report by BIMB Securities Research, the old system caused interest to be charged at the initial stage (front-loading).
The old method also indirectly encouraged borrowers to choose longer loan periods.
Under the new system, interest is only charged based on the remaining loan balance, rather than being charged at the beginning of the period.
Borrowers who settle car debts early or make a lump sum payment will earn more significant savings.
The new reducing balance system is considered fairer as borrowers will now only pay interest based on the remaining loan balance.
According to Bank Securities Research, the new framework ‘provides significant savings to borrowers who choose shorter tenures or make early repayments.’
Analysts also expect banks’ profit margins to ‘shrink slightly’ under the new system, with banks likely to require higher down-payments.
The move is expected to benefit national brands such as Proton and Perodua, which dominate the low-value vehicle segment in Malaysia.
