Car loans and the end of the flat rate

"Only 3%." It is the kind of number that sells a car.

Bank Negara Malaysia's consumer guide to the new hire purchase law says variable rate loans were only 15% of the hire purchase loans banks offered at the end of 2024. The rest were fixed rate, and the old law worked out fixed rate interest the flat way.

The Hire-Purchase (Amendment) Act 2026 changes that. Here is what it means, one worked example, and the DECADES cards where a player meets it.

What changed

Hire purchase is the kind of loan used to buy a car or a motorcycle in instalments. Both are on the list of goods in the Hire-Purchase Act 1967, the law that the 2026 Act amends.

Bank Negara's guide, and its announcement of 17 March 2026, give the main points:

• The new Act came into force on 1 June 2026.
• Interest on new hire purchase loans is worked out on the reducing balance, which means on what you still owe. The price is shown as an effective interest rate, or EIR.
• The reducing balance method replaces the Rule of 78, and the flat rate formula goes.
• You can still pick a fixed rate or a variable rate loan.
• For a fixed rate loan, the EIR can be no more than 17% a year for up to five years, and 16% for longer loans. For a variable rate loan the cap stays at 17%.
• Lenders have a grace period until 31 March 2027 to change their systems, and those that are ready can switch earlier. Until then, the guide says to ask a lender whether it has switched yet.

Flat and reducing, in plain words

A flat rate works out the interest on the whole amount you first borrowed, for every year of the loan, as if you owed the full sum right to the end.

A reducing balance works out each month's interest on what you still owe. Every payment makes the balance smaller, so the next month's interest is smaller too.

The Rule of 78 is the old way of deciding how much of the flat interest falls in each month. It puts more of the interest at the start. The guide says this left a bigger amount to pay for anyone who settled the loan early. Under the new method, once you pay off what you owe, no more interest builds up.

One worked example

Take a car loan of RM 40,000 over 7 years at 3% flat.

• 3% of RM 40,000 is RM 1,200 a year. Over 7 years that is RM 8,400 of interest.
• RM 40,000 plus RM 8,400 is RM 48,400. Split over 84 months, that is RM 576 a month.

What yearly rate on the reducing balance gives the same RM 576 a month for 84 months on RM 40,000? We worked it out with a short program: about 5.6%.

So "3% flat" and "5.6% effective" describe the same loan. Same payment, same RM 8,400 of interest. Only the second number shows the real cost of the borrowing.

On the reducing method, about RM 186 of the first RM 576 is interest. After three years you owe about RM 24,740.

Bank Negara's guide gives its own example: RM 100,000 over 9 years at 3% flat is RM 1,175.93 a month and RM 27,000 in interest, the same as an EIR of 5.5%. Our program agrees.

What does not change

Agreements signed before the new Act keep their original terms. The guide says a hirer and a lender can agree to move an old loan to the new method, if the lender's systems are ready.

A longer loan still costs more interest, as the second card below shows.

And a personal loan is not hire purchase. A bank can still quote a personal loan at a flat rate today. That is changing too: Bank Negara's policy document on personal financing bans the flat rate and the Rule of 78 for personal loans from banks from 1 January 2027.

The cards in DECADES

"Flat or reducing?" can turn up from about age 24, if you have a job. It opens like this, word for word:

The car is RM 40,000 over 7 years. The salesman says the loan is "only 3%". Your uncle used to work at a bank. He asks if that is the old flat way of counting or the real rate on the balance. The salesman goes quiet.

The worked example above is this card's own sum. Ask for the real rate and shop around, and the 3% turns out to be about 5.6% on the balance. Another bank offers 4.5%: RM 556 a month, not RM 576, and one question saved RM 1,700. Sign because 3% sounds cheap, and you pay RM 576 for 84 months: RM 48,400 for a RM 40,000 car. Or walk away, and the old bike gets a new chain.

"Sign now, interest rates are rising" offers a fixed rate car loan of RM 42,000 at 5.6% a year. Five years is RM 804 a month and RM 6,250 of interest. Seven years is RM 606 a month and RM 8,870. Same car, same rate: the card's lesson is that the number of years is your only lever. A third choice asks which of your numbers the central bank rate moves. The salesman admits it is not this one: the rate is set the day you sign. In real life, the guide says a variable rate loan can move with the Overnight Policy Rate.

The game's own bank lists the car loan as Hire Purchase (vehicle), at 6.5% reducing. The line under it reads: "6.5% on what you still owe, up to 9 years; long terms hide the cost." Next to it, the Personal Loan is 6.5% flat, and its note says that is about 12% effective. When you check a reducing loan, the game shows its effective rate. For a flat one it leaves that out, unless your character studied accounting.

The game is fiction

DECADES is a game. The cars, the salesman, the banks and every number on its cards are made up, and the game's loans follow the game's rules, not the law. Nothing here is advice about your own money. For anything real, go to the official pages linked above.

Play it

Meet the salesman and his 3% in one life. Play DECADES in your browser, free and with no sign-up.

Teachers can use these cards in class with the 40-minute lesson on the teachers page.