Save money! Goodwill discount from banks or save even more

Save money! Goodwill discount from banks or save even more

Rule of 78 is no more.

When we borrow money to buy our car, the banks calculate the repayment using Rule of 78. Total interest does not change but the interest portion is larger at the start. In other words, paying earlier may just meant paying a lot more interest in the beginning. The effective date for the new rules is expected in the first quarter of 2026. It does not really benefit everyone but it does benefit all the ones who intend to pay off their car loans earlier versus over the loan repayment period. There is however a goodwill discount offered by banks. Do read below for information:

Article in malaymail.com. Malaysian banks will offer a “goodwill discount” to customers with existing fixed-rate car loans who choose to settle their financing early, in a collective move to align with the country’s new, fairer Hire-Purchase Act.

The initiative was announced today by the nation’s main banking associations following the passing of the Hire-Purchase (Amendment) Bill, which will abolish the controversia Rule of 78 interest calculation method for new loans.

The new law will require all future hire-purchase agreements to use a fairer “reducing balance” method for interest calculation. 

The goodwill discount is the banking industry’s proactive measure to ensure that existing customers, whose loans are still under the old Rule of 78 system, receive comparable treatment if they decide to pay off their loan ahead of schedule. Article in malaymail.com.

Here is how this is calculated if it’s based on Rule of 78

Article in paultan.org When you take a hire purchase loan, you are typically shown the flat rate which is used to calculate interest payments based on the original loan principal. For example, if you take up a nine-year loan for RM100,000 with a 3% flat rate, your total interest would be RM27,000 (RM100,000 x 3% x nine years). 

Adding the total interest payable to the principal amount (RM100,000), you arrive at RM127,000, which is then divided by the number of months (nine years = 108 months) to give a monthly instalment amount of RM1,176 (rounded for easier understanding). 

With each monthly instalment paid, the amount is split to pay off the interest and principal, which, in the simple interest method would be the same throughout the entire loan tenure. However, this isn’t the case as hire purchase providers do not follow this simple interest method.

Instead, hire purchase providers use a method called the Rule of 78 which apportions more of the interest earlier in the loan term before progressively reducing it towards the end. We’ve covered this topic before. 

The short of it is that the Rule of 78 isn’t favourable to those who wish to settle their loan early. This is because with most of your instalment amount being directed to pay off the interest in the early period of the loan, a good portion of the principal amount still needs to be settled. Article in paultan.org

There is no need to pay off quickly unless we really have too much money

The car loan is maybe 3 percent. If we pay off as early as possible, we could be saving 3 percent interest. However, we could also use the money to invest into some investments which could give us far higher returns than 3 percent. Of course, if we do not have much knowledge about investing, then the best way remains to pay off the car loan as soon as you could because no one knows what will happen in the future, right?

Just remember yeah, that lump sum of money which we use to pay off the whole car loan could have also been used for some investments that could offer a much higher dividend return too. For example, Real Estate Investment Trusts (REITs) which are considered pretty stable could be one such investment vehicle. We also have that potential for capital appreciation because no one knows if suddenly the REIT revalues its assets and the value has gone up thus pushing up its share price too.

If we TRULY want to save on car loan interest, this is a better way

Buy a cheaper car lah. Instead of a Japanese branded one, buying the same segment but a national brand will save easily RM20,000. Instead of buying Segment C (for comfort), maybe can buy one segment lower; Segment B and save RM30,000 maybe. If we buy a lower segment and a national brand versus a higher segment and a Japanese brand, then we save maybe RM50,000? One example as below: Proton X50 (Segment B) versus Toyota Cross (Segment C).

Else, just buy that latest launched Segment A Proton Saga and easily save double the amount of interest by paying off loan early for example…

Sorry, as someone with some understanding about personal finance (slightly more than any expert who kept telling you property investment is not needed…), I can safely tell you to focus on the big picture. Driving the new Proton Saga does not make you feel inferior unless you think so.

Then again, if you are truly very wealthy, then a Toyota Cross should not even be in the list of cars you should be buying to make you truly stand out from everyone else yeah. If we want to show off, then do it properly. Else, save those money for traveling… for treating our loved ones to nice dinners… for bring our children to nice theme parks… for emergency savings in case of any unforeseen circumstances.

Cheers,

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