Paying off your car loan early should noticeably reduce what you still owe. From 1 June 2026, banks in Malaysia will start offering goodwill discounts to some borrowers who settle older fixed rate hire purchase loans early, as the industry begins moving away from the Rule of 78.

The discounts will be introduced alongside the Hire Purchase Amendment Act 2026, which also takes effect on 1 June 2026. The law changes how new hire purchase financing is calculated and begins the shift from the long used flat rate structure to a reducing balance method.

Goodwill Discounts Will Mainly Help Borrowers Settling Older Loans Early

The most immediate change for consumers is the new goodwill discount for certain existing hire purchase loans. It is aimed at borrowers who want to settle early and have often found that the savings were smaller than expected using the current system.

Under the Rule of 78 and the flat rate structure, a larger share of the finance cost is pushed into the earlier part of the loan. As a result, someone who has already spent a few years making repayments may still find the settlement figure higher than expected when trying to clear the balance early.

Banks say the goodwill discount is meant to bring that outstanding amount closer to what it might have been under a reducing balance method. In practical terms, that means some borrowers could get a fairer settlement figure when they pay off their loan ahead of schedule.

Eligibility Depends On The Loan Type, Signing Date, And Account Status

The discount will apply to individuals, as well as micro and small businesses, with fixed rate hire purchase agreements that use the Rule of 78. It covers loans signed before 1 June 2026, and also loans signed during the transition period that runs until 31 March 2027, as long as they still fall under the older structure.

Eligibility also depends on the repayment record, because the account must be in good standing. Borrowers will not qualify if they are more than 90 days in arrears, under legal action, or already in a debt management programme.

This means the clearest benefit will go to borrowers who are still making repayments and are already in a position to settle early, whether by using savings, selling the car, or moving to cheaper financing elsewhere. Borrowers already under financial strain are less likely to benefit straight away, because the discount does not reduce monthly instalments and only applies at the point of early settlement.

The Savings Will Vary From One Loan To Another

Banks will not be applying one standard discount to every eligible loan. Instead, each bank will work out the goodwill discount based on the features of the existing agreement, including the tenure and the timing of the early settlement request.

That means borrowers should not assume the improvement will be large in every case. Some may get a noticeably better settlement figure, while others may see only a smaller adjustment. The exact amount will only be given when the customer asks for an early settlement quotation.

This is also a limited concession rather than a full repricing of older loans. Existing contracts are not being automatically converted into reducing balance financing, so the discount helps narrow the gap without rewriting the original terms.

New Hire Purchase Loans Will Move To Reducing Balance

Behind the goodwill discount is the legal change affecting new hire purchase loans. From 1 June 2026, the Hire Purchase Amendment Act 2026 requires banks to move to a reducing balance method, where interest is charged on the remaining principal instead of being built around the old flat rate model.

That is a meaningful pricing change because it affects how borrowing costs build up over time. It should also make early settlement outcomes more reasonable for future borrowers, since the remaining balance will better reflect how much principal is still unpaid. The flat rate interest structure will also be abolished under this framework, which should make financing offers easier to compare on a like for like basis.

The Market Will Stay Mixed During The Transition Period

Although the law takes effect on 1 June 2026, banks have until 31 March 2027 to complete the systems, processes, and infrastructure changes needed to comply. During that transition period, they may continue offering new financing under the Rule of 78, although some banks are expected to move to reducing balance earlier.

For borrowers, that creates a market where the financing method may differ from one bank to another for several months. A car buyer taking a loan after 1 June 2026 could still be offered the older structure, depending on where they apply, and two loans that look similar based on monthly instalment alone may still lead to different total borrowing costs and different early settlement outcomes.

That is why borrowers are being encouraged to compare loans using the effective interest rate, which reflects the actual finance cost, and to ask banks directly whether they already offer the reducing balance method during the transition. A list of banks that are ready to offer the new method will be published on the websites of the Association of Banks in Malaysia, the Association of Islamic Banking and Financial Institutions Malaysia, and the Association of Development Finance Institutions of Malaysia.

The Main Relief Is Better Early Settlement, Not Lower Monthly Payments

The clearest immediate gain is a potentially better settlement figure for borrowers with older hire purchase loans who want to pay off their debt early. That benefit will only reach borrowers with eligible Rule of 78 loans, accounts in good standing, and enough financial room to settle, whether through savings, a car sale, or refinancing.

Borrowers who continue paying as normal will see no change to their monthly instalments, while people applying for new loans will need to check carefully whether a bank has already moved to reducing balance during the transition period. The shift should make car financing fairer, but the practical benefit still depends on the loan a borrower already has, the bank they choose, and whether early settlement is realistically within reach.

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