Flat rate versus effective interest rate

Flat rate and EIR answer different questions

BNM defines a flat-rate personal financing product as one whose stated interest or profit rate remains specified for the whole tenure while the charge is calculated on the original amount disbursed at the beginning. The calculation base does not shrink simply because part of the principal has been repaid. This is why a flat percentage may look smaller than an EIR attached to financing with the same instalments and total interest.

For hire-purchase, BNM describes EIR as the actual percentage of interest paid over the financing tenure. It reflects interest based on the outstanding loan balance at a given time as monthly instalments are paid. Under reducing balance, each instalment is divided between interest calculated on outstanding principal and principal repayment.

EIR is a better headline for comparing offers on different bases, but it is not the whole decision. BNM’s disclosure rules require a provider to state the effective interest or profit rate and total repayment when a rate is advertised, explain whether calculation uses a daily or monthly rest, and disclose whether the rate is fixed or floating.

SourcesBNM-PF-2025BNM-HP-2026BNM-DISCLOSURE-2024

BNM’s RM100,000, nine-year comparison

BNM’s 2026 hire-purchase consumer guide gives a precise illustration: assume RM100,000 is borrowed for nine years, or 108 months. Bank A quotes a flat rate of 3% per annum and Bank B quotes an EIR of 5.5% per annum. Both produce a monthly instalment of RM1,175.93 and total interest of RM27,000. Bank C quotes an EIR of 5% per annum, producing RM1,151.76 monthly and RM24,390 total interest.

The lesson is not that 3% flat always converts to 5.5% EIR. BNM states that equivalence for a nine-year tenure in this specific illustration. Conversion depends on structure and tenure; fees and other cash flows may also affect comparisons. Do not apply a universal multiplier.

Read the outputs together: the instalment shows recurring burden and total interest shows financing charge over the tenure. Bank A and Bank B have different headline rates but identical cash outcomes. Bank C is lower on both outcomes in BNM’s illustration.

SourcesBNM-HP-2026

Fixed is not the same as flat

Fixed describes whether a rate changes over time. Flat describes the amount on which interest or profit is calculated. BNM’s personal financing policy defines fixed-rate financing as financing whose rate is determined on or before disbursement and remains specified for the whole tenure, with interest or profit calculated on a reducing balance. It separately defines flat-rate financing as using the original disbursed amount as the calculation base.

BNM’s 2026 hire-purchase guide makes the distinction operational. Consumers may choose fixed-rate or variable-rate hire-purchase financing, while both use reducing-balance calculations under the new framework. For fixed-rate financing, the rate and monthly instalments stay the same. For variable-rate financing, the rate and instalment can move with rate changes.

Ask two separate questions: can the rate change, and what balance is interest calculated on? Fixed answers only the first. Confirm the second from the product disclosure sheet, repayment schedule and agreement.

SourcesBNM-PF-2025BNM-HP-2026

Compare the cash flows, not one percentage

Start with offers for the same amount and tenure. Compare the EIR or effective profit rate, total repayment, total interest or profit, and every scheduled instalment. BNM requires providers to disclose the financing amount, applicable terms, total repayment, total interest or profit charges, and a schedule showing the first instalment date, number and frequency of instalments, and amount of each instalment.

Identify costs outside the headline rate. BNM requires disclosure of applicable fees and charges, including when each is payable and factors affecting its level. Ask whether insurance or takaful is required, whether any cost is financed rather than paid upfront, and whether late-payment charges apply. Do not assume every fee is included in the EIR unless the disclosure says so.

For a floating-rate offer, treat the displayed schedule as conditional. Providers must explain circumstances in which the rate may increase and the impact. Compare a realistic higher-rate scenario if payment certainty matters to the budget.

• Use the same amount and tenure.
• Compare EIR, total repayment and total interest or profit.
• Add fees and required ancillary costs.
• Check the rest basis and whether the rate can change.

SourcesBNM-DISCLOSURE-2024

Early settlement can change what matters

Before signing, check whether there is a lock-in period, early-settlement charge and rebate entitlement. BNM’s disclosure policy requires providers to disclose the charge, calculation method and due date and, if a rebate applies, its entitlement and calculation method. Providers must also explain whether prepayment or overpayment is allowed and how it affects interest or profit.

For hire-purchase agreements under the new 2026 provisions, BNM says providers will no longer give a rebate at early settlement. That does not mean future interest continues after settlement. Under reducing balance, after the outstanding balance is paid no further interest accrues, so BNM says the need for a waiver or rebate does not arise.

Existing hire-purchase agreements differ. BNM says agreements signed under earlier terms continue under their original contractual terms. A customer and provider may mutually agree to elect the amended method for calculating net balance due, subject to provider readiness. Obtain a settlement quotation and rely on the applicable agreement.

SourcesBNM-HP-2026BNM-DISCLOSURE-2024

The 2026 hire-purchase grace period

BNM’s consumer guide states that the Hire-Purchase (Amendment) Act 2026 took effect on 1 June 2026 and providers have a grace period through 31 March 2027 to make systems and infrastructure changes for reducing-balance calculations and EIR pricing. A ready provider may begin using the method at any time during that period.

During the grace period, ask whether the specific package uses reducing balance and EIR. Do not assume the method from application date or the words fixed rate. Request the EIR, total repayment, instalment schedule and product disclosure sheet in writing.

Do not confuse this transition with BNM’s separate personal financing policy. That policy prohibits covered providers from offering personal financing calculated using flat rate or Rule of 78, but relevant paragraphs take effect on 1 January 2027 and its scope excludes vehicle financing.

SourcesBNM-HP-2026BNM-PF-2025