Malaysia’s Hire Purchase (Amendment) Act 2026 will come into force on June 1, 2026, introducing several major reforms aimed at improving transparency and fairness in vehicle financing or car loans. The amended law was gazetted on January 30, 2026, with the government setting a four-month implementation window for hire purchase providers to prepare their systems
Malaysia’s Hire Purchase (Amendment) Act 2026 will come into force on June 1, 2026, introducing several major reforms aimed at improving transparency and fairness in vehicle financing or car loans.
The amended law was gazetted on January 30, 2026, with the government setting a four-month implementation window for hire purchase providers to prepare their systems and processes.
Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said financial institutions that are ready may begin offering hire purchase agreements under the new framework once the law takes effect. However, a transition period may still be given to providers that require more time to update documentation, systems and operational processes.
Among the biggest changes introduced under the amendment is the abolition of the flat interest rate and the Rule of 78 calculation method, which has long been used in hire purchase loans.
Under the Rule of 78 method, interest payments are front-loaded in the early period of the loan, meaning a large portion of early instalments goes toward paying interest rather than reducing the loan principal. As a result, borrowers who wish to settle their loans early often face a higher outstanding balance, even after making several years of payments.
The amended Act replaces this system with an Effective Interest Rate (EIR) approach. EIR reflects the true cost of borrowing, taking into account fees, charges and the full amortisation schedule. This allows borrowers to compare loan offers across banks more easily.
At the same time, interest will be calculated using a reducing balance method, where interest is charged based on the remaining principal balance, similar to how housing loans are structured. This means borrowers who settle their loans early will pay less interest overall, as the outstanding principal reduces over time.
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The amendments also modernise the hire purchase process by allowing the use of digital technologies in loan agreements. Borrowers will be able to use digital signatures and submit hire purchase documentation electronically, removing the need for physical paperwork in many cases. This is expected to streamline the application process and reduce the need for customers to visit banks or financial institutions in person.
According to industry bodies including 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), banking institutions will also provide goodwill discounts starting June 1.
These discounts are intended for borrowers who wish to settle existing hire purchase loans taken under the old flat interest rate and Rule of 78 method, ensuring their outstanding balances are comparable to customers entering new agreements under the revised system.
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