Flat rate and Rule of 78 are ending: what changes in 2027

Most regulatory news does not reach borrowers, and this one deserves to. Bank Negara Malaysia has revised its policy document on personal financing, and from 1 January 2027 a licensed bank, licensed Islamic bank or prescribed development financial institution may not offer personal financing priced on a flat rate, nor use the Rule of 78 to calculate interest or profit charges. Reducing balance becomes the required method.

If that sounds technical, here is the consequence in one sentence: the two mechanisms that made Malaysian personal loans more expensive than they appeared, and made paying them off early almost pointless, are being removed from bank products.

The change sits alongside a second requirement on the same date. Anyone applying for personal financing above RM 100,000 will have to complete a fifteen-minute financial education module, the AKPK-developed one or a bank's own equivalent, covering effective interest rates, penalty charges and contract terms. The RM 100,000 threshold was chosen because it mirrors the bankruptcy threshold.

This article explains what the two methods actually do to your money, what replaces them, exactly who is covered, and what it means if you are signing a loan agreement in the meantime.

A flat rate charges interest on the original amount borrowed for the whole tenure, regardless of how much you have already repaid. A reducing-balance rate charges interest on what you still owe, so the interest falls every month as the balance does.

The same percentage therefore means two very different things. Take RM 12,000 over 36 months. At 8% flat the interest is RM 2,880 and the instalment is RM 413. At 8% reducing the interest is RM 1,537 and the instalment is RM 376. Same headline number, same loan, and RM 1,343 of difference.

To compare them honestly you have to convert. A flat rate of X% works out to roughly 1.8 times X on a reducing basis, so 8% flat is about 14.5% reducing. The ratio drifts a little with the rate and the tenure, but 1.8 is close enough for a first pass.

This is why the practice drew regulatory attention. A borrower comparing 8% from one lender against 8% from another, where one is flat and one is reducing, is not comparing anything. From 2027 both bank numbers will be on the same basis, and a quoted rate will mean what a reasonable person assumes it means.

• 4% flat is roughly 7.5% reducing.
• 6% flat is roughly 11% reducing.
• 8% flat is roughly 14.5% reducing.
• 12% flat is roughly 21% reducing.
• On RM 12,000 over 36 months, 8% flat costs RM 2,880 in interest; 8% reducing costs RM 1,537.

The Rule of 78 is the rebate formula that decides how much interest you get back if you settle a flat-rate loan early. It assumes interest is earned in a descending pattern, heaviest in the first month and lightest in the last. The name comes from a twelve-month loan, where the digits one to twelve add up to 78.

The effect is that interest is treated as mostly earned long before the loan is mostly repaid. On our RM 12,000 loan at 8% flat over 36 months, settling at the halfway point leaves an unearned portion of only about RM 739 out of RM 2,880, so you have effectively been charged 74% of the interest for 50% of the time. Settle with six months to go and the rebate is around RM 91, which a settlement charge of three months of interest wipes out completely.

In other words, the method penalises exactly the behaviour everyone agrees should be encouraged. A borrower who comes into money and wants to clear a debt early gets almost nothing for it. That is the problem the prohibition is aimed at, and it is the same reasoning that drove the hire purchase reform. We work through the whole rebate table in /blog/early-settlement-personal-loan-malaysia.

Under reducing balance there is no rebate formula, because there is no unearned interest to return. Pay a lump sum and next month's interest is simply calculated on a smaller balance. Early repayment becomes worth doing, automatically.

Three reform tracks are running at once, which is why the coverage has been confusing. They have different dates and different scopes.

Personal financing from banks and prescribed development financial institutions: the flat rate and Rule of 78 prohibition takes effect on 1 January 2027, as does the financial education requirement for financing above RM 100,000.

Hire purchase: the Hire-Purchase (Amendment) Act 2026 came into force on 1 June 2026, abolishing flat rates and the Rule of 78 for new agreements in favour of reducing balance priced on an effective interest rate. Providers were given until 31 March 2027 to finish the systems work, and banks have separately committed, through the Association of Banks in Malaysia, to goodwill discounts where an older fixed-rate Rule of 78 agreement is settled early, which is an industry undertaking rather than a statutory right.

Non-bank credit generally: the Consumer Credit Act 2025 was gazetted on 31 December 2025 and took effect on 1 March 2026, with its licensing provisions following on 1 June 2026. Buy now pay later providers came under licensing from that date with six months to comply.

The important point for existing borrowers: these rules apply to new agreements. A flat-rate loan or hire purchase signed before the relevant date continues on its original terms until maturity. Nothing is retroactively recalculated, so if you hold a front-loaded loan today, the arithmetic in this article still describes it.

• 1 March 2026: Consumer Credit Act 2025 in force, except licensing provisions.
• 1 June 2026: Hire-Purchase (Amendment) Act 2026 in force; Consumer Credit Act licensing begins, including for BNPL.
• 1 January 2027: banks and prescribed DFIs may no longer price personal financing on a flat rate or use the Rule of 78; financing above RM 100,000 requires the AKPK education module.
• 31 March 2027: end of the hire purchase transition period for systems and effective-rate pricing.
• 2028 onwards: moneylending and pawnbroking oversight moves from KPKT to the Consumer Credit Commission under the published second phase of the reform.

This is where most of the confusion sits, and it matters because it determines what you will actually be quoted.

Bank Negara Malaysia regulates licensed banks, licensed Islamic banks and prescribed development financial institutions. Its policy document binds those institutions. If your lender is a bank, from 1 January 2027 you will be quoted on a reducing balance.

Licensed moneylenders, including MyTrustCredit, are regulated by the Ministry of Housing and Local Government (KPKT) under the Moneylenders Act 1951, not by Bank Negara. The policy document does not apply to us, and flat-rate pricing remains lawful for licensed moneylenders. Our rates stay capped by the Act at 18% a year for unsecured lending and 12% for secured.

That gap is not permanent. Under the Consumer Credit Act 2025, oversight of moneylending moves from KPKT to the Consumer Credit Commission in a second phase scheduled for 2028 to 2030. The Moneylenders Act 1951 itself is only expected to be repealed and folded into the new framework in a third phase from 2031, and that sequence is a published roadmap rather than law yet. Whether flat-rate pricing survives that transition is not yet decided, and any licensed lender telling you otherwise is guessing.

Meanwhile the new framework has begun imposing something that matters more day to day. The Consumer Credit Commission's Conduct Standards require a credit provider to assess whether a borrower can actually afford to repay before approving, looking at income and its stability, existing credit obligations and repayment history. Under those standards individuals are covered with no loan-size cap, and small businesses are covered for borrowing up to RM 300,000. One carve-out matters if you use those apps: for buy now pay later specifically, the affordability assessment only bites above a threshold of RM 1,000 per customer, so a small limit can still be approved without one. Those standards currently bind the providers the Commission licenses, meaning buy now pay later, leasing and factoring companies, and not KPKT-licensed moneylenders, who come under them in the 2028 phase. We assess affordability anyway, and we should be clear that today that is our own policy rather than the Commission's rule for us.

If you are borrowing from a bank and your need is not urgent, there is a genuine argument for waiting. A reducing-balance loan taken in 2027 is cheaper for the same quoted rate, and it lets you clear the debt early without the rebate problem. Set against that, nobody knows what rates will be in 2027, and a lender moving from flat to reducing may simply quote a higher reducing number to land in the same place. Waiting is worth it for the early-settlement flexibility, not for a guaranteed lower price.

If you are borrowing now, from anyone, two habits protect you. Ask for the total repayable in ringgit, not just the rate, because a total cannot be misread the way a percentage can. And ask what you would pay to settle at the halfway point, in writing. Those two numbers make any two offers comparable regardless of which method either lender uses.

If you already hold a flat-rate loan, nothing changes and nothing needs to. Do not refinance purely to escape the method, because a new facility brings new processing fees and stamp duty and restarts the front-loading on a fresh schedule. Refinance only if the new rate, converted to the same basis and including fees, is genuinely lower. Our walk-through at /blog/debt-consolidation-loan-malaysia shows how to run that comparison properly.

And if you are shopping for a loan above RM 100,000 in 2027, budget fifteen minutes for the education module rather than being surprised by it at the application stage. A product capped at RM 20,000, like ours, never reaches that threshold.

We price in flat rates, we use the Rule of 78 for early settlement rebates, and both are lawful for a KPKT-licensed moneylender. Writing an article about why regulators are removing those mechanisms from bank products, while using them ourselves, requires us to be straight with you about it.

So: a flat rate makes a loan look cheaper than it is, and the Rule of 78 makes early settlement less rewarding than it should be. Those are real criticisms and we are not going to pretend otherwise. What we can do is make sure you are never misled by either. Every Letter of Offer states the total repayable in ringgit, the exact rebate formula, and the settlement charge. Ask us for a settlement figure at any point and we will give it to you as three separate lines: the outstanding principal, the Rule of 78 rebate, and the settlement charge.

What we would ask you to do in return is convert before you compare. Multiply any flat rate by about 1.8 before you set it against a bank's reducing-balance number. If the bank is cheaper on that basis and will approve you, take the bank. Our product exists for borrowers banks will not serve quickly enough or at all, not for borrowers who have a cheaper option and have not checked.

MyTrustCredit is a KPKT-licensed moneylender (Licence No. WL10287/2024) lending directly under the Moneylenders Act 1951. Personal loans run from RM 500 to RM 20,000 over 1 to 5 years, priced from 4% p.a. flat depending on your profile, which is roughly 7.5% on a reducing basis at the bottom of that range. 4% is the floor rather than the typical rate. Your rate is set on your profile and can run up to the statutory cap, so ask for the total repayable in ringgit and convert it before you compare us with anyone. A processing fee of 1% to 2%, or RM 50 to RM 100 flat, plus 0.5% stamp duty with a minimum of RM 10, is disclosed in the Letter of Offer. Nothing is paid before approval and the eligibility check does not appear in CCRIS.

The baseline checks include being 21 or older with a valid MyKad, 60 or under when the loan matures, earning at least RM 2,000 gross a month including fixed allowances, with no active default in the last 12 months, and income proof of three months of payslips or a recent EPF statement, or six months of bank statements if you are self-employed. We typically decide within 24 working hours and disburse 24 to 72 hours after you sign.

Before you apply anywhere, run the total repayable on /calculator and compare it against every offer you can get on the same basis. Then apply at /apply if ours is the one that makes sense. If a bank, a co-operative or your own Akaun Fleksibel is cheaper for your situation, that is the right answer and we would rather you took it.