Fourteen out of 20 banks now offer reducing balance for car loans under Hire Purchase (Amendment) Act 2026

Following the implementation of the Hire Purchase (Amendment) Act 2026 on June 1, after it was gazetted on January 30, 2026, the ministry of domestic trade and costs of living (KPDN) said that 14 out of the 20 banks in the country have begun offering a reducing balance method for customers with hire purchase loans.

According to KPDN minister Datuk Armizan Mohd Ali, the remaining six banks have committed to finalising their transition from the old flat-rate and the Rule of 78 calculation methods to the reducing balance method by December 31, FMT reports.

He added that 80% of the 429 hire-purchase providers registered under the association of hire purchase companies Malaysia are transitioning to both the reducing balance method and the effective interest rate. It was previously indicated that a transition period will be given to hire purchase providers that require time to adjust their systems, documentation and processes to meet the new requirements.

“It is mandatory for all hire-purchase providers to enforce the new laws under the amended Hire Purchase Act, The remaining 20% of providers must complete the transition within the given grace period, which ends on March 31, 2027,” he said.

The amendments to the act include abolishing the use of flat interest rates and Rule of 78 method, which front-loads interest in the early period of the loan. Put simply, the Rule of 78 method isn’t favourable to those who wish to settle their loan early because most of your monthly instalment amount is directed to pay off the interest in the early period of the loan, leaving a good portion of the principal amount outstanding, something that has been discussed before.

In place of the flat interest rate is something called effective interest rate (EIR), which better reflects the true cost of borrowing by taking into account additional fees, charges as well as the amortisation schedule. Essentially, EIR helps you to better compare various loan offers on an apple-to-apple basis – lower EIR, less interest.

Complementing the EIR is the use of a reducing balance method to calculate interest/profit, whereby the amount of interest payable will be calculated based on the outstanding principal. Under the new method, interest charges will be calculated based on the outstanding principal amount.

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