(TAX UPDATE) Malaysian Hire Purchase Amendment: Why the Change from Flat Rate and Rule of 72 Matters

If you have ever taken a car loan in Malaysia, this new law will change the game, and this time, it benefits the borrower.

On 6 October 2025, the Minister of Domestic Trade and Cost of Living tabled the Hire-Purchase (Amendment) Bill 2025 in Parliament. It marks one of the most significant consumer protection reforms in Malaysia’s financial history.

The most important change: The government will prohibit the “flat rate” and “Rule of 72” methods used in car loan interest calculations and replace them with the “reducing balance method.”

This means fairer loan charges and real interest savings, especially for those who settle their loans early. This reform addresses a long-standing unfair practice that has quietly cost Malaysian consumers millions of ringgit.

Understanding the Old System: Why It Was Unfair

The Rule of 72: Front-Loaded Interest

Under the Rule of 72, also called the “Sum of Digits” method, lenders collect most of the interest during the early months of your loan.

Example: For a 12-month loan, total interest is divided into 72 parts (1+2+3...+12 = 72). The largest portion (12/72) is paid in the first month, and the smallest (1/72) in the last.

If you settle your loan early, say after 3 months, you only get about 70% of the total interest rebate because the bank has already collected almost 30% upfront. This is why early settlement under the current system gives little real savings.

The Flat Rate Problem

Under the flat rate method, the bank charges interest on the full original loan amount throughout the loan period, even though the balance decreases monthly.

This makes car loans look cheaper on paper but costlier in practice. The longer the tenure, the more interest the borrower pays, even if the loan is settled early.

The Fairer Way: Reducing Balance Method

The new reducing balance formula calculates interest only on the outstanding principal balance. As borrowers make payments, both the balance and the interest decrease.

Key advantages include:

Lower total interest cost for the same loan amount
Meaningful savings for early settlement
Transparent calculation and clear linkage to the actual debt balance
Fairness similar to housing loans

This method is already the global standard. The Rule of 72 has long been banned in countries such as Australia, the United Kingdom, the United States, and across the European Union for being unfair to borrowers.

Part of a Larger Credit Reform in Malaysia

This reform is part of a broader initiative involving:

Ministry of Domestic Trade and Cost of Living: spearheading the amendment
Bank Negara Malaysia: already prohibiting the Rule of 72 for personal loans starting 2027
Consumer Credit Oversight Board (CCOB): regulating non-bank lenders

Other highlights include:

A reference rate tied to the BNM Overnight Policy Rate (OPR) for transparent pricing
Legal recognition of digital signatures and e-contracts for hire purchase agreements

Who Benefits Most

Majority of car loan borrowers in Malaysia choose to settle early. The reform will benefit:

Car buyers who prefer flexible repayment terms
Borrowers who improve their finances and clear debts early
SMEs that purchase vehicles for business use

Financial institutions are expected to adapt smoothly, shifting towards variable-rate loans while maintaining profitability.

Implications for Auditors and Tax Agents

While this reform protects consumers, it also brings clarity for accountants, auditors, and tax agents.

Cleaner accounting and audit evidence
The reducing balance method simplifies interest recognition and aligns with MFRS 9 principles of substance over form.
Clearer client communication
When SMEs ask about early settlement savings, we can now explain the impact using a transparent formula.
Improved disclosure
Loan schedules, confirmations, and deferred tax calculations will now reflect more realistic figures.

Final Words

Dewan Rakyat will debate the amendments to the Hire Purchase Act on 8 October 2025. At the end of during the sitting, Parliament will publish the Order Papers. Let’s wait the game changer very soon.

Written by:
KOH TECK PENG, Approved Company Auditor & Licensed Tax Agent (Malaysia)
KTP & Company PLT (www.ktp.com.my)

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