KUALA LUMPUR (March 16): Banks in Malaysia are introducing "goodwill discounts" for customers who choose to settle their existing fixed-rate hire-purchase loans early, as the banking industry prepares for a landmark shift in how such financing is calculated.
The Association of Banks in Malaysia, along with the Association of Islamic Banking and Financial Institutions Malaysia and the Association of Development Finance Institutions of Malaysia, announced in a statement on Monday that the industry-led discount initiative will be launched on June 1, 2026.
This coincides with the official implementation of the Hire-Purchase (Amendment) Act 2026 (HPAA) — which effectively outlaws the controversial "Rule of 78" interest method for all new hire purchase loans, which are typically used for vehicle financing — with a transition period until March 31, 2027 for banks to perform necessary systems, processes and infrastructure enhancements to comply with the new law.
During the transition period until March 31, 2027, banks may continue offering new financing under the "Rule of 78" while upgrading systems, though some will be ready to adopt the reducing balance method earlier, according to the banking associations.
Up until now, Malaysian car loans have been using a "flat rate" and the Rule of 78, which front-loads interest charges. This meant that borrowers who tried to pay off their cars early often found they saved little as the bank had already collected the bulk of the interest in the first few years.
Under the new law, banks must switch to a reducing balance method, similar to housing loans, where interest rate is charged only on the remaining principal. And the flat-rate interest rate structure will be abolished.
While the law primarily applies to new contracts, customers who entered into hire-purchase agreements before the implementation of the HPAA and choose to settle their financing early will be offered the "goodwill discounts" as a gesture of the industry's commitment to support customers during the transition, the associations said.
"With the goodwill discounts, customers who entered into hire-purchase agreements before banks’ implementation of the HPAA and choose to early settle their hire-purchase financing early will have an outstanding balance that is more comparable with what it would have been under the reducing balance method.
"Each bank will calculate goodwill discounts based on features of the customer’s existing agreement, including the financing tenure and the timing of early settlement. The exact discount and details will be given to customers when they request for early settlement," the statement read.
Who is eligible?
The discounts are available to individuals, and micro and small businesses with fixed rate hire purchase agreements that apply the Rule of 78, where:
- the loan agreement was signed before June 1, 2026 or during the transition period ending March 31, 2027
- the account must be in good standing (not in arrears exceeding 90 days, not under legal action, and not in debt management programme)
With the effective date approaching in June 2026, customers who are looking to apply for hire-purchase financing are encouraged to ask the banks whether they offer the new reducing balance method during the transition period, and to use the effective interest rate to compare financing options across banks, the statement read.
The effective interest rate is defined as the rate reflecting the actual finance cost of a hire-purchase agreement.
A list of banks ready to offer the reducing balance method during the transition period is available on the websites of all three associations at www.abm.org.my, www.aibim.com and www.adfim.com.my.