If you have ever taken a car loan in Malaysia, you have probably come across the term hire purchase. For most buyers, it is the standard way to finance a car: you pay a deposit, a financier covers the rest, and you repay the balance through monthly instalments over several years.

Now, Malaysia is changing part of that framework, especially regarding early settlement.

The Hire Purchase (Amendment) Act 2026 is set to take effect on 1 June 2026. The key change is that the new framework abolishes the flat-rate method and the Rule of 78, replacing them with a reducing balance and effective interest rate (EIR) approach for the new regime. This is meant to make car financing fairer and easier to understand for consumers.

1. What is a hire purchase?

A hire purchase is the most common financing structure used for car purchases in Malaysia. In simple terms, the lender finances most of the vehicle price, and the buyer repays it through fixed instalments over an agreed period.

Under the traditional structure, many hire-purchase agreements have used a flat-rate calculation, and early settlement could be affected by the Rule of 78. Under this method, a larger portion of the finance charge is effectively allocated earlier in the loan tenure, which means borrowers may see less benefit than expected when settling early.

2. What is changing under the new Act?

The main change is that Malaysia is moving away from the Rule of 78 and the flat-rate structure for the new framework.

In its place, the law shifts toward a reducing balance and effective interest rate (EIR) approach, which is intended to better reflect the true cost of financing. It also supports more modern documentation processes such as digital execution and electronic submission.

In practical terms, this means borrowers should get a clearer picture of what they are actually paying for, and early settlement should be treated in a way that more fairly reflects the remaining loan balance.

3. How will this impact car buyers?

Here is a simple side-by-side view:

For borrowers with existing loans, there is also a transition measure. The banking industry has announced an industry-wide goodwill discount for eligible borrowers who choose to settle early. The goodwill discount will be calculated based on the features of the existing agreement, and the exact amount may vary by bank and product.

4. Example: a 5-year-old Honda City with 2 years of loan balance left

To make this easier to understand, here is a simple illustrative example.

1. Car: Honda City
2. Original loan amount: RM75,000
3. Tenure: 9 years
4. Flat rate: 4.0%
5. Loan age today: 7 years paid
6. Balance left: 2 years

Illustrative comparison:

*Illustrative only for comparison purposes. Actual early-settlement figures, rebates, or goodwill discounts may vary from bank to bank depending on the financing product, agreement terms, settlement timing, and eligibility.

5. For those who want to know how this is calculated

For readers who want to understand the maths behind the example, here is the simplified way to look at it.

A. Under the old hire-purchase structure

Total finance charge = Loan amount × Flat rate × Loan tenure

RM75,000 × 4.0% × 9 = RM27,000

Total repayment = RM75,000 + RM27,000 = RM102,000

Monthly instalment = RM102,000 ÷ 108 = RM944.44

B. Under the old Rule of 78 method

Rebate = Total finance charge × [sum of remaining months ÷ sum of all months]

Sum of all months for a 108-month loan = 108 × 109 ÷ 2 = 5,886

Sum of remaining 24 months = 24 × 25 ÷ 2 = 300

Rebate = RM27,000 × (300 ÷ 5,886) ≈ RM1,376.49

Remaining instalments total = 24 × RM944.44 = RM22,666.56

Estimated early settlement = RM22,666.56 − RM1,376.49 = RM21,290.07

Rounded for readability: about RM21,290

C. Under the new reducing-balance approach

Interest is charged based more closely on the remaining balance over time, which means the settlement amount should generally be closer to the true outstanding amount at that point in the loan.

Final takeaway

For ordinary Malaysian car buyers, the new Act is mainly about fairness and transparency. It does not mean every existing car loan will suddenly change overnight. But it does mean the system is moving away from older structures that were often harder for borrowers to understand, especially when it came to early settlement. For people planning to upgrade, sell, or settle a loan ahead of schedule, this is an important change to be aware of.

Thinking of selling your car before your loan ends?

Before you think about early settlement, it helps to know your car’s current market value. Mobee Cars Malaysia helps car owners understand their selling price more clearly, so you can make a better decision before upgrading, settling your loan, or letting go of your car.

Check your car value with Mobee Cars Malaysia today.