If you have ever tried to settle a car loan early, you may have noticed something frustrating. Even after paying instalments for years, the remaining balance can still feel unexpectedly high.

That experience often comes from how hire purchase loans are structured today. Starting June 1, 2026, changes to Malaysia’s hire purchase law aim to make those loan calculations fairer for borrowers.

The Hire Purchase (Amendment) Act 2026 will take effect on that date, four months after it was gazetted on January 30, 2026. The amendments introduce new rules for how interest is calculated, how agreements can be signed, and how lenders administer hire purchase loans.

Flat Interest And Rule Of 78 Will Be Removed

One of the biggest changes involves how interest is calculated on hire purchase loans, which are widely used for car financing.

Under the current system, many loans apply a flat interest rate together with the Rule of 78 method. This structure allocates a larger share of interest payments at the beginning of the loan period.

As a result, a significant portion of early instalments goes towards interest rather than reducing the loan principal. When a borrower decides to settle the loan early, the remaining balance can still appear high because the principal has not reduced as much as expected.

Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said the amendments will abolish both the flat interest structure and the Rule of 78 calculation method.

Removing these mechanisms is intended to align loan balances with the actual cost of borrowing. Borrowers who repay their loans ahead of schedule should see an outstanding balance that better reflects the remaining principal.

The change affects the structure of repayments rather than the price of the vehicle itself. It determines how much of each instalment reduces the principal and how settlement amounts are calculated if the loan is paid off early.

Early Settlement Amounts Will Be More Transparent

The biggest frustration for borrowers usually appears when they attempt to settle their loan before the scheduled end date.

Under the existing structure, the settlement amount can remain relatively high even after several years of payments. Because interest is concentrated in the early repayment period, the savings from early settlement may be smaller than borrowers expect.

By removing the Rule of 78 and flat interest calculations, the revised framework aims to produce repayment schedules that distribute interest and principal more evenly across the loan period.

This means settlement balances should more accurately reflect how much of the principal remains unpaid when a borrower decides to clear the loan early.

However, the law does not automatically lower the overall cost of car ownership. Vehicle prices, loan tenure options, and interest rates offered by lenders will still depend on market conditions and lender policies.

Digital Agreements Will Be Allowed

The amendments also modernise how hire purchase agreements can be completed.

Under the revised law, lenders will be allowed to use digital signatures and electronic submission of documents for hire purchase transactions.

This change mainly affects how loan agreements are processed. Borrowers may be able to complete documentation electronically instead of relying on physical paperwork and in person verification.

The adjustment is designed to reduce administrative delays and simplify the process of signing loan agreements.

Lenders May Receive A Transition Period

Although the amendments officially take effect on June 1, 2026, not every hire purchase provider may immediately adopt the new structure.

Armizan said lenders that require time to update their systems, documentation, and loan processing procedures may be given a transition period.

Providers that are ready may begin offering hire purchase agreements under the revised rules once the law comes into force.

This means borrowers applying for car loans after June 2026 may encounter slightly different loan structures depending on which lender they approach and whether the provider has completed its transition.

Part Of Consumer Credit Reform

The hire purchase amendments form part of ongoing reforms to strengthen Malaysia’s consumer credit framework.

The Consumer Credit Act 2025, regulated by the Ministry of Finance, came into force on March 1, 2026 after being passed by Parliament in 2025.

These legal changes aim to improve transparency in consumer lending, strengthen oversight of credit providers, and provide clearer protections for borrowers.

Car Loan Approval Rules Remain The Same

Despite the legal updates, the basic process of obtaining car financing remains unchanged.

Banks and hire purchase providers will still assess borrowers based on income levels, existing debt commitments, and repayment ability. Loan approval will continue to depend on credit profiles and affordability checks.

The amendments do not affect vehicle prices, minimum down payment requirements, or the core process of applying for a hire purchase loan.

What changes is the structure of how interest is allocated during the loan period and how settlement balances are calculated. Borrowers who choose to repay their loans earlier should see balances that more closely reflect the remaining principal rather than a repayment schedule that heavily concentrates interest in the early instalments.

The reform is intended to make hire purchase loans easier to understand and more transparent for borrowers deciding whether to keep their loan until maturity or settle it earlier.

Follow us on our official WhatsApp channel for the latest money tips and updates.