New rules make settling car loans early a smart choice

2026-03-26 - 23:21

You can now save approximately 50% of remaining interest when settling at loan midpoint. (Freepik pic) PETALING JAYA: For years, Malaysians have been paying more for their cars than they realised – not because they made poor choices, but because of how the system was designed. If you’ve wished to pay off your car loan early – and realised it barely made a difference – you’re not alone. That’s about to change. A new amendment to Malaysia’s Hire Purchase Act is set to overhaul how car loan interest is calculated, replacing a system that has long favoured lenders with one that finally gives borrowers a fair shot. Licensed financial planner Wong Choon Hong puts it simply: “Save interest, free up the cash flow.” The amendment shifts car loan calculations from flat rate to effective rate with reducing balance – enabling borrowers to save significantly more interest when settling loans early, particularly beneficial for those with seven- to nine-year tenures who experience income growth. Under the old system, interest was calculated based on the original loan amount (flat rate), even after a significant portion had been repaid. On top of that, the Rule of 78 meant borrowers were effectively paying most of their interest upfront. “Most of the interest has already been earned by the bank at the beginning,” Wong, 36, revealed. This created a frustrating situation. Borrowers who tried to settle their loans early often discovered the savings were far less than expected. “People thought they could save 60%, but actually maybe only 20% or 30%,” he said, describing it as “not fair for those who want to do early settlement.” Wong Choon Hong says it’s about time the Hire Purchase Act was amended by the government. (Wong Choon Hong pic) The revised framework now calculates interest based on what you still owe (effective rate) – meaning the more you pay down, the less interest you’re charged over time. So if you initially owe RM100,000, interest is calculated on that amount. But as you pay it down – say to RM60,000 – the interest drops accordingly, something the previous system never allowed. This shift makes early settlement far more meaningful. “If you settle midway, you can save about 50% of the total interest,” Wong said. “Previously, maybe only 5% or 10%. On top of that, banks are expected to offer goodwill discounts for early settlement from June 1 – putting even more savings back into borrowers’ pockets. For many Malaysians, this change comes at the right time. Car ownership isn’t optional, especially with patchy public transport connections for daily commutes. As a result, many borrowers stretch their loans – sometimes up to nine years – just to keep monthly payments manageable. For someone earning RM3,000, that can easily mean about RM600 a month going towards their car – before even factoring in petrol, tolls, and maintenance. But incomes don’t stay the same forever. “For fresh graduates, their income can grow very fast,” he said. That’s where the new system creates an opportunity. As salaries increase or bonuses come in, borrowers can choose to settle their loans early – and this time, actually benefit from it. Early settlement removes fixed monthly commitment, enabling reallocation towards other financial objectives. (Freepik pic) And the benefits go beyond interest savings. A car instalment doesn’t just affect your monthly cash flow; it also affects your ability to borrow. Banks look at your debt service ratio (DSR), and a car loan can take up a significant portion of it. “If you clear the car loan, you free up your debt service ratio,” Wong explained. “Then you can go for other financial objectives, like buying a property.” There are also longer-term advantages. Clearing the loan can improve your credit standing, especially for borrowers who may have missed payments in the past. Still, taking advantage of this new system requires intention. “First, look at wastage,” Wong said, pointing to unused gym memberships and forgotten subscriptions. From there, it’s about making smarter swaps rather than drastic cuts. “It’s not about eliminating completely... but substitution,” said Wong. But cutting expenses alone won’t be enough. “In the long term, you need to increase your income,” he added, whether through career progression, switching jobs, or building new skills over time. For years, paying off your car early felt like a losing game. Now, for the first time, it might actually be worth it.