Banks in Malaysia will begin overhauling hire purchase financing from June 2026, as the industry moves to clearer loan pricing and fairer early settlement terms.

The changes come under the Hire-Purchase (Amendment) Act 2026, which takes effect on 1 June 2026.

In a joint statement, the Association of Banks in Malaysia, the Association of Islamic Banking and Financial Institutions Malaysia, and the Association of Development Finance Institutions Malaysia said the new framework will abolish the Rule of 78 method for early settlement and remove flat-rate pricing for fixed-rate hire purchase financing.

Hire purchase financing will instead shift to a reducing balance method, while the use of the Effective Interest Rate, or EIR, is meant to help borrowers better understand and compare financing costs.

Banks will also offer goodwill discounts to eligible customers who choose to settle existing fixed-rate hire purchase financing early, where the agreement uses the Rule of 78 method.

The discounts are intended to bring settlement amounts closer to what borrowers would have paid under the reducing balance method.

The Ministry of Domestic Trade and Cost of Living has set a transition period until 31 March 2027 for banks to update their systems, processes and infrastructure.

During that period, banks may still offer new hire purchase financing under the Rule of 78 method, although some may introduce the reducing balance method earlier.

The discounts will apply to individuals as well as MSMEs with fixed-rate hire purchase agreements under the Rule of 78 method.

The agreement must have been entered into before 1 June 2026 or during the transition period, and the financing must be settled before maturity.

They will not apply to accounts that are more than 90 days in arrears, under legal action or a repossession order, or already under restructuring and rescheduling or a formal debt management programme.

Hire purchase financing remains widely used in Malaysia, especially for vehicle purchases, and the changes are expected to strengthen consumer protection and improve transparency in the market.

Customers applying for hire purchase financing during the transition period are encouraged to check whether a bank already offers the reducing balance method and to use the EIR to compare options across lenders.

Featured image: Edited by Fintech News Malaysia, based on image by user8285578 via Freepik