HP Act 2026: What Changes for Your Car Loan from June 1

For more than fifty years, the way Malaysian car loans worked sounded simple but penalised anyone who tried to pay early. From 1 June 2026, that changes. The Hire-Purchase (Amendment) Act 2026 (HPAA) abolishes the Rule of 78 and the flat interest-rate structure on all new car loans¹. In their place: the same reducing-balance method that has been standard in Australia and the UK for decades².

This guide walks through exactly what changes, what stays the same, what happens to the car loan you already have, and how to compare bank offers fairly under the new rules.

What changes on 1 June 2026

The Ministry of Domestic Trade and Cost of Living (KPDN) confirmed the HPAA takes effect on 1 June 2026, with a transition window until 31 March 2027 during which banks upgrade their systems³. Five things change at once:

1. Rule of 78 is abolished for early-settlement calculations on all new hire-purchase agreements.
2. Flat-rate interest is abolished as the headline calculation method.
3. Reducing-balance method becomes the standard — interest is calculated on the outstanding principal each month, not the original loan amount.
4. Effective Interest Rate (EIR) disclosure becomes mandatory in marketing materials and loan agreements, so you can compare like-for-like across banks.
5. Digital signatures are allowed for HP agreements, ending the in-person paper-signing requirement.

Both fixed-rate and variable-rate loans remain available — that part doesn't change. What changes is how the interest inside those loans is calculated¹.

Rule of 78 vs reducing balance — why the change matters

Under the old flat-rate method, the bank multiplied your loan amount by a percentage and the number of years up front. That total interest was then divided across every monthly instalment. Whether you had RM12,000 left or RM1,000 left, you kept paying interest as if the whole RM12,000 was still owed.

The old Rule of 78 then decided when, inside the loan, you'd pay that interest off. It front-loaded the cost — most interest was charged in the early months, so if you settled in year two of a seven-year loan, the bank had already collected the bulk of the interest and you saw very little back.

Bank Negara Malaysia's own consumer guide describes the old approach plainly:

"The Rule of 78 method frontloads interest payments, resulting in higher initial interest costs and a larger outstanding principal amount due in the event of early settlements."¹

The new reducing-balance method works the way most people already think loans work: interest is recalculated each month on whatever principal you still owe. Pay down the loan and the interest portion drops the next month. Settle early and there is genuinely less to pay because, in BNM's words, "once the customer pays off the outstanding balance, no further interest charges subsequently accrue. Hence, the need for such a waiver or rebate does not arise"¹.

Worked example — RM80,000 car, 7-year loan

Take a Proton X70 financed at RM80,000 over 7 years (84 months), with a quoted flat rate of 3.5% p.a. — typical of Malaysian car HP financing today⁴.

Under the old method, the total interest is RM80,000 × 3.5% × 7 years = RM19,600, divided into 84 equal instalments of RM1,185.71 — the same payment whether month 1 or month 80. Under reducing balance at the same 3.5%, total interest falls to about RM10,315.80 — roughly RM9,284 less over the life of the loan. The Effective Interest Rate (IRR method) on that flat 3.5% works out to about 6.44% p.a. — see flat rate vs effective rate for how that conversion works — that's the EIR figure banks must show you from June 2026.

The Effective Interest Rate (EIR) you'll see quoted post-June 2026 will look higher than today's flat rate. That isn't banks charging more — it's the true cost of borrowing, surfaced honestly. The Malay Mail explained it cleanly in November 2025: "this is not banks charging more — it is revealing the actual borrowing cost that was obscured by the old calculation"².

You can compare both methods on your own numbers with our flat-rate calculator.

What about my existing car loan?

If you signed your HP agreement before 1 June 2026 — or during the transition period that ends 31 March 2027 — the new rules don't automatically rewrite your loan. But the Association of Banks in Malaysia, AIBIM, and ADFIM have committed to a goodwill discount for customers who choose to settle early under the old Rule of 78 method⁵.

The discount is calculated by each bank individually based on your loan's tenure and how far into it you are. The point of the discount is to make the outstanding balance "more comparable to what it would have been under the reducing balance method"⁵.

To qualify:

• Your HP agreement must have been signed before 1 June 2026 or during the transition (1 June 2026 to 31 March 2027)
• You must choose to early-settle the loan
• Your account must not be in arrears beyond 90 days
• Your account must not be under legal action, repossession, restructuring & rescheduling, or a formal debt management programme

Banks must disclose the exact discount when you request the early settlement figure⁵.

You can also ask your lender whether they're willing to mutually convert your existing loan to the reducing-balance method during the transition period. The HPAA explicitly allows this, but it requires both you and the bank to agree¹.

What to do before 1 June 2026

For the next car loan you take:

1. Ask for the EIR, not just the flat rate. From June, banks must disclose it — you can ask now.
2. Compare across at least three banks using the same EIR figure. Member bank lists are at abm.org.my, aibim.com, and adfim.com.my.
3. Ask if the bank offers reducing-balance during the transition — some will be ready earlier than others⁵.

For the car loan you already have:

1. If you have spare cash, do the early-settlement math both ways — with and without the upcoming goodwill discount.
2. Request the early-settlement figure from your bank after 1 June. The discount is automatic for eligible accounts.
3. Don't rush to refinance — for many existing loans, the goodwill discount will deliver most of the benefit of the new system without the cost of refinancing.

Try our flat-rate vs reducing-balance comparison calculator to see what either approach would mean for your own loan amount, rate, and tenure.