The answer depends on which method your agreement uses, not only on how much you still owe.
Settling a car loan early stops future interest, but it rarely removes all the interest still printed on your repayment schedule. On an older fixed-rate agreement that uses the Rule of 78, the lender works out a rebate that is smaller than the remaining scheduled interest. On an agreement priced with the reducing-balance method that the Hire-Purchase (Amendment) Act 2026 brings in, you pay the outstanding principal and interest stops there, so no rebate is needed. In the worked example below, the two methods end up only a few hundred ringgit apart, while the common belief that you "skip all the remaining interest" overstates the saving by thousands.
Which rules apply to your agreement?
The Hire-Purchase (Amendment) Act 2026 took effect on 1 June 2026, with a transition period until 31 March 2027 for lenders to move their systems to the reducing-balance method and the effective interest rate (EIR). Bank Negara Malaysia (BNM) says the changes apply only to new agreements made after the Act takes effect; existing agreements continue on their original terms. During the transition, banks may still offer new Rule-of-78 financing, while some already offer the reducing-balance method.
| Your agreement | How early settlement is worked out | What to ask the lender |
|---|---|---|
| Fixed rate, Rule of 78 (signed before 1 June 2026, or during the transition on the old method) | Remaining scheduled instalments minus a rebate of unearned interest; the Rule of 78 allocates more interest to the early months. From 1 June 2026, eligible customers also get a bank-calculated goodwill discount. Also deduct any applicable statutory insurance rebate if you request cancellation of the insurance contract. | A written settlement quotation showing the rebate, the goodwill discount and the date the figure is valid until. |
| Reducing balance under the amended Act | The outstanding amount financed plus interest accrued up to the next instalment due date or the settlement date in your written notice, whichever is later. No further interest accrues after settlement, so there is no rebate. Also deduct any insurance surrender value received or receivable by the lender on cancellation, where the policy covers the amount financed and you pay its premium to the lender in instalments. | The outstanding balance on your settlement date and any charges listed in your agreement. |
| Existing agreement you want moved to the new method | Section 22(3) of the amending Act lets you and your lender mutually agree to calculate the net balance due under the new method, subject to the lender's system readiness. | Whether the lender can recalculate your net balance on the reducing-balance method, and the resulting figure. |
Older variable-rate agreements already used reducing balance, but their original settlement rules continue unless you and the lender mutually elect the amended calculation. Ask which rules apply, including the interest calculation date and insurance deduction.
Worked example: one loan, three ways to count what is left
This uses the same hypothetical loan as our five, seven or nine years guide: RM81,000 borrowed at a 2.9% flat rate over nine years (108 months). Total interest is RM21,141 and the monthly instalment is RM945.75. The 2.9% rate is an illustration, not a current bank offer. We compare three settlement figures after two, three and five years of payments.
| Settle after | Instalments still scheduled | Rule of 78 rebate | Rule of 78 settlement | Reducing-balance settlement (same EIR) | "Skip all remaining interest" figure |
|---|---|---|---|---|---|
| 2 years (84 months left) | RM79,443.00 | RM12,822.52 | RM66,620.48 | RM66,190.43 | RM63,000.00 |
| 3 years (72 months left) | RM68,094.00 | RM9,439.10 | RM58,654.90 | RM58,173.88 | RM54,000.00 |
| 5 years (48 months left) | RM45,396.00 | RM4,223.89 | RM41,172.11 | RM40,803.86 | RM36,000.00 |
How the numbers are reached, using the three-year row:
- Instalments still scheduled: 72 × RM945.75 = RM68,094.00.
- Rule of 78 rebate (the "statutory rebate" defined in section 2 of the Hire-Purchase Act 1967): total interest × n(n+1) ÷ N(N+1), where n is the months left and N the total months: RM21,141 × (72 × 73) ÷ (108 × 109) = RM21,141 × 5,256 ÷ 11,772 = RM9,439.10. Settlement = RM68,094.00 − RM9,439.10 = RM58,654.90.
- Reducing balance at the same effective rate: the same RM945.75 instalment repays RM81,000 over 108 months at about 0.444% a month (about 5.33% a year when multiplied by 12, or 5.46% compounded). If you settle on an instalment due date, the balance still owed after 36 payments is the present value of the remaining 72 instalments at that rate: RM58,173.88.
- "Skip all remaining interest": RM68,094.00 minus an equal share of interest for every month left (72 × RM195.75 = RM14,094.00) gives RM54,000.00. No method on this page produces that figure; it is shown because many people expect it.
Two things stand out. First, the Rule of 78 settlement is RM368 to RM481 higher than the reducing-balance figure in this example. That gap is the cost of front-loaded interest, and it is the kind of difference a goodwill discount may reduce; each bank calculates its own discount, so the amount is not predictable from this table. Second, the "skip all remaining interest" figure is RM3,190 to RM5,172 lower than either real method. If you are budgeting around that number, your actual settlement will be higher.
All figures exclude any charges set out in your own agreement and assume no arrears. Obtain a dated written settlement quotation from your lender, check the calculation and applicable deductions, and query any unexplained amount before paying.
The goodwill discount: who qualifies
The banking associations ABM, AIBIM and ADFIM said in a joint statement that from 1 June 2026 banks will give goodwill discounts to eligible customers who settle existing fixed-rate Rule-of-78 hire-purchase financing early. According to the statement:
- the agreement must have been made before 1 June 2026 or during the transition period;
- eligible customers are individuals and micro and small businesses who settle before maturity;
- at the time you apply, the account must not be more than 90 days in arrears, under legal action or a repossession order, or under restructuring, rescheduling or a formal debt-management programme;
- each bank calculates the discount from your agreement's features, including the tenure and the timing of settlement, and gives you the exact figure when you request early settlement.
If you are in a debt-management programme, speak to AKPK or your lender before assuming a discount applies.
How to check a settlement quotation
- Give the lender written notice of the date you intend to settle (the Hire-Purchase Act requires notice in writing) and ask for a written settlement quotation for that date, noting how long the figure is valid.
- Find out whether your agreement uses the Rule of 78 or the reducing-balance method. Your agreement or product disclosure sheet should say; if not, ask.
- For a Rule-of-78 agreement, check that the quotation shows the rebate and, if you are eligible, the goodwill discount as separate lines.
- Compare the total against the instalments still scheduled. If the quotation is close to the full remaining instalments, ask how the rebate was calculated.
- Ask whether the lender can recalculate your net balance using the reducing-balance method, which the Act allows by mutual agreement.
- Keep the quotation, your payment proof and the lender's confirmation that the account is fully settled.
If a query about the new rules is not resolved, BNM's guide points bank customers to the Financial Markets Ombudsman Service (FMOS) or BNMLINK, and non-bank hire-purchase customers to the Ministry of Domestic Trade and Cost of Living (KPDN).
Is settling early the right move?
Settling stops future interest, but it also uses cash. Before you settle, check that you still keep an emergency reserve, and compare the effective rate on this car loan with any more expensive debt you have, such as a credit-card balance. On a lower-rate car loan near the end of its term, the remaining interest is small, and keeping the cash may matter more. Our car affordability guide covers the running costs that keep coming after the loan ends.
If you are choosing a new car loan instead, compare offers by their effective interest rate rather than the flat rate. Our flat versus reducing-balance guide explains the difference, and you can compare car-loan rates or check bank reference rates.
Do I save all the remaining interest if I settle early?
No. On an older Rule-of-78 agreement the rebate is smaller than the interest still scheduled, because the method treats more of the interest as earned in the early years. Ask for a written settlement quotation.
Is the goodwill discount automatic?
It applies to eligible customers who apply to settle an existing fixed-rate Rule-of-78 agreement early from 1 June 2026. Each bank calculates the amount and shows it when you request early settlement.
Does a reducing-balance car loan still give an early-settlement rebate?
No rebate is needed. Interest is charged on the outstanding principal, so once you pay off that balance no further interest accrues.
Calculate with your own numbers
Indicative planning only; not a settlement quotation, legal advice or a guarantee of any discount. Obtain a dated written settlement quotation from your lender and query any unexplained amount before paying.
Sources
- BNM, Consumer Guide: Five Key Highlights of the Hire-Purchase (Amendment) Act 2026 (FAQs 1, 7, 8 and 10) — published 17 March 2026; reviewed 13 October 2026.
- ABM, AIBIM and ADFIM joint statement on hire-purchase changes and early-settlement discounts — published 16 March 2026; reviewed 13 October 2026.
- Hire-Purchase (Amendment) Act 2026 (Act A1783), sections 11 (new section 14(4), net balance due) and 22(3) (existing agreements) — gazetted 30 January 2026; reviewed 13 October 2026.
- Hire-Purchase Act 1967 (Act 212), reprint as at 1 May 2019, section 2 (statutory rebate) and section 14 (early completion by written notice) — reviewed 13 October 2026.