Malaysia’s hire-purchase landscape is about to change in a meaningful way. With the long-criticised Rule of 78 finally being abolished under the upcoming Hire-Purchase (Amendment) Act, banks across the country are preparing to introduce a goodwill discount for borrowers who choose to settle their existing fixed-rate car loans early.
This move marks an important step toward fairness for consumers who have been tied to older interest calculation systems for years.
The End of the Rule of 78
For a long time, the Rule of 78 has shaped how interest is charged on hire-purchase loans. The issue is that it front-loads interest, which means borrowers pay most of the interest during the early part of the loan tenure.
If a borrower decided to settle early, the financial savings were often much smaller than expected. Many customers felt they were being penalised for trying to pay off their loans faster.
The amended Hire-Purchase Act, expected to take effect in the first quarter of 2026, will abolish the Rule of 78 and flat-rate structures for new loans. All future hire-purchase financing must apply the reducing balance method, which is widely recognised as a fairer and more transparent system.
So What Exactly Is This Goodwill Discount?
Existing loans cannot be retroactively converted to the new system. To bridge this gap, banks will offer a goodwill discount for customers who settle their loans before maturity.
In simple terms, the discount will adjust the early settlement amount so that it feels more aligned with what borrowers under the new reducing balance system would pay. The discount amount will depend on the features of each individual agreement, including the timing of settlement and interest structure.
Banks will inform customers of the exact amount and provide a clear explanation during the application process.
Who Qualifies For The Goodwill Discount
The goodwill discount is available to individuals and micro or small businesses with fixed-rate hire-purchase agreements, including those that use the Rule of 78 method. To qualify, the agreement must have been signed before the amended Hire-Purchase Act (HPAA) takes effect or within the 18-month grace period after the Act comes into force. Borrowers must also choose to settle their financing early, meaning any time before the original loan maturity date.
To be eligible at the time of early settlement, the account must be in good standing. This means it must not be in arrears for more than 90 days, not subject to legal action, not issued with a repossession order, and not under any restructuring and rescheduling arrangement or enrolled in a formal debt management programme.
Borrowers who prefer to continue paying their instalments until maturity are not required to take any action and will not be affected by these changes.
A Fairer Experience For Borrowers
This initiative reflects a broader push toward fairness, transparency and consumer protection in Malaysia’s hire-purchase sector. For many years, early settlement under the Rule of 78 felt disproportionately costly due to its front-loaded interest calculations.
The goodwill discount is meant to correct this imbalance and ensure that existing customers receive treatment that is closer to the new regulatory standard.
The programme is expected to run for up to nine years, which is roughly the time needed for all remaining Rule of 78-based loans to mature or be settled.
What Borrowers Should Do Next
Once the amended Act is officially in force, borrowers who are considering early settlement should contact their respective bank to check their discounted settlement amount.
All banks under ABM, AIBIM and ADFIM will follow the same guiding principles, although the discount amount may differ depending on individual loan terms.
For many borrowers, this may be the first time early repayment genuinely translates into meaningful savings.
Source: here
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