Malaysia abolished the Rule of 78 on 1 June 2026. It had been written into the Hire-Purchase Act since 1967, Bank Negara calls it "widely criticised for being inequitable", and getting rid of it is a good reform.
But the rule was never where the real money was. On Bank Negara's own worked example, it costs a borrower who settles early at most about RM632 on a RM100,000 loan. Misreading the advertised rate on the same loan costs RM2,621 — four times as much, and it happens to everybody, not just to early settlers.
What the Rule of 78 actually is
It is a formula for deciding how much of your unearned interest you get back when you settle a fixed-rate hire-purchase agreement early. The Act calls it the "statutory rebate" and defines it by arithmetic rather than by name:
"…the amount derived by multiplying the terms charges by the sum of all the whole numbers from one to the number which is the number of complete months in the period of the agreement still to go (both inclusive) and by dividing the product so obtained by the sum of all the whole numbers from one to the number which is the total number of complete months in the period of the agreement"
Sum of the digits. For a 12-month agreement the denominator is 1+2+…+12 = 78, which is where the name comes from. The effect is to front-load the interest relative to a reducing-balance calculation, so an early settler gets back slightly less than the interest they have not yet accrued.
How much less
Take Bank Negara's own example: RM100,000 over nine years at a 3% flat rate, which is RM27,000 of terms charges and an instalment of RM1,175.93. Settle after m months and compare what the Rule of 78 asks for against what an actuarial calculation at the equivalent rate would ask for.
| Settling at | Rule of 78 overcharge |
|---|---|
| Month 12 | about RM390 |
| Month 37 (the worst point) | about RM632 |
| Month 72 | about RM400 |
| Month 108 (full term) | RM0 |
The penalty is zero at both ends and peaks in the middle, which is a property of the formula rather than a policy choice. At its worst it is 2.34% of the terms charges — real money, and roughly half a monthly instalment.
The number nobody advertises
Now the other cost. Bank Negara's guide puts three quotes side by side, and the point of the table is that two of them are the same product:
| Quoted as | Monthly instalment | Total interest |
|---|---|---|
| Flat rate of 3% p.a. | RM1,175.93 | RM27,000 |
| EIR of 5.5% p.a. | RM1,175.93 | RM27,000 |
| EIR of 5% p.a. | RM1,151.76 | RM24,390 |
In the regulator's words: "For a loan with a 9-year tenure, an EIR of 5.5% p.a. is equivalent to a flat rate of 3% p.a."
⚠️ A borrower comparing "3%" against "5%" picks the 3%, because 3 is less than 5. They have just chosen the more expensive loan by RM2,621 over the term. That is 4.1 times the worst the Rule of 78 could have done to them, it applies whether or not they ever settle early, and no formula was needed to produce it — only two numbers quoted on different bases.
So what did the reform fix?
Mostly the quoting. The valuable part of the 2026 amendment is that hire-purchase must be quoted on an effective interest rate basis, which makes the 3%-versus-5% comparison impossible to construct. That change is worth roughly four times what abolishing the rebate formula is worth, and it is not what the coverage led with.
Two further things follow from the Act that are worth knowing before you act on any of this.
It is prospective. The changes apply to agreements entered into after the amendment came into force. If you signed before 1 June 2026, you are still on the old basis, and the RM632 is still yours to lose.
The Act never required the Rule of 78 in the first place. The 1967 definition has a second limb covering agreements where "the terms charges have been calculated on a simple interest basis … on the amount outstanding from month to month". Reducing-balance hire purchase was lawful throughout. The Act supplied sum-of-digits as the default for fixed-rate agreements, and the market chose fixed-rate agreements.
What this does not mean
It does not mean the abolition was pointless. A formula that systematically favours the lender on early settlement should not be in a statute, the criticism of it is fair, and removing it is right on its own terms.
It does not mean Bank Negara has misled anyone either — the RM2,621 comparison is drawn straight from their own consumer guide, and the equivalence sentence is theirs. They published the more important number. It simply is not the one that made headlines.
The reform reported as a win for early settlers is worth four times more to borrowers who see their loans through to the end.
What to do with it
If you are shopping for hire purchase or a car loan now, ask for the effective rate and refuse to compare anything else. A flat rate roughly doubles when converted, and the multiplier depends on the tenure, so two flat rates on different terms are not comparable either. Our loan calculator and car loan calculator both work on a reducing balance, which is the basis a quoted EIR uses.
If you are already in an agreement signed before June 2026 and thinking about settling early, ask the financier for the settlement figure in writing and check it against the statutory rebate formula above. The gap is largest around the one-third mark of the term.
Where this comes from, and what will date it
The statutory rebate definition and the simple-interest limb are quoted from the official text of the Hire-Purchase Act 1967 published by the ministry. The criticism of the Rule of 78, the three-bank comparison table, the equivalence sentence and the prospectivity of the amendment are from Bank Negara Malaysia's consumer guide to the 2026 amendment.
Every figure above was recomputed here from those inputs rather than quoted. Bank Negara's table reproduces: 3% flat on RM100,000 over nine years is RM27,000 of charges and an instalment of RM1,175.93, and an EIR of 5.5% on the same principal and tenure gives the same instalment to the sen. The RM632 is the maximum gap between the statutory rebate and an actuarial rebate at that equivalent rate, found by evaluating every settlement month from 1 to 107.
⚠️ One limit worth stating. The RM632 and the RM2,621 both belong to this loan — RM100,000 over nine years. The overcharge scales with the terms charges and the tenure, so a shorter loan produces a smaller absolute figure. The absolute ringgit changes with the loan size and the tenure; the ratio between the two costs is what holds.
This will date in one specific way, and it is worth watching for: the amendment carries a transition period running to 31 March 2027, so the population of agreements still on the old basis shrinks to zero over the next few years. The comparison between the two costs does not date, because quoting on incompatible bases is a habit rather than a rule.
