The Hire Purchase (Amendment) Act 2026 will come in force on June 1 this year, four months after it was gazetted on January 30, 2026. This was revealed by the ministry of domestic trade and costs of living (KPDN), with amended Act serving to strengthen consumer credit fairness as well as modernise the hire purchase framework in Malaysia.
Key reforms that are part of the amended Act include abolishing the use of flat interest rates and Rule of 78 method, with the latter front-loading interest in the early period of the loan. Put simply, the Rule of 78 method isn’t favourable to those who wish to settle their loan early because most of your monthly instalment amount is directed to pay off the interest in the early period of the loan, leaving a good portion of the principal amount outstanding – we’ve covered this topic before.
In place of the flat interest rate is something called effective interest rate (EIR), which better reflects the true cost of borrowing by taking into account additional fees, charges as well as the amortisation schedule. To put simply, EIR helps you to better compare various loan offers on an apple-to-apple basis – lower EIR, less interest.
Complementing the EIR is the use of a reducing balance method to calculate interest/profit, whereby the amount of interest payable will be calculated based on the outstanding principal, kind of like with housing loans.
As such, it is more advantageous for borrowers who plan to settle their loans early, as there will no longer be anymore front-loading of interest in the early period of the loan like with the Rule of 78 – here’s an example. According to Bank Negara Malaysia, his switch is consistent with global practices that has abolished the Rule of 78, such as in Australia, New Zealand and United Kingdom.
With EIR better reflecting the true cost of borrowing, it will also be easier for you to shop for a hire purchase loan. Meanwhile, the end of the Rule of 78 and adoption of the reducing balance method means you won’t be “punished” as severely for wanting to settle your hire purchase loan early.
In addition to protecting consumers, the amended Act also allows for better convenience, as you will be able to opt to provide electronic or digital signatures and to send/receive hire purchase agreements and related documents electronically. This speeds up the application process because you no longer need to be physically present at a bank to deal with hire purchase-related documents.
Originally, hire purchase providers were given a grace period of 18 months from the date the amended Act is gazetted to implement the above-mentioned measures. However, KPDN said several parties, including parliament members, urged for the amended Act to be enforced as soon as possible.
Following negotiations, it was decided that the amended Act would come into effect on June 1, 2026. However, a transition period may be given to hire purchase providers that require time to adjust their systems, documentation and processes to meet the new requirements. Those that are already ready can issue new hire purchase agreements following the amended Act from said date.
As announced by the Association of Banks in Malaysia (ABM), the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) and the Association of Development Finance Institutions of Malaysia (ADFIM) in December last year, banking institutions will offer goodwill discounts from the date the amended Act comes into effect.
These discounts are provided to borrowers that want to settle their hire purchase agreements under the old method – flat interest rate and Rule of 78 – to ensure their outstanding balance is comparable to customers entering new agreements based on the new method.
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I have been wondering why Malaysia still uses such outdated laws for car loans. Finally we have updated laws to force the banks to change their misleading tactics. Banks would not willingly change their ways unless being forced to do so.