Banks to offer early settlement discounts for hire purchase loans

 Some banks will offer the goodwill discounts from June 1 in line with amendments to the Hire Purchase Act, say three associations representing banks.

Certain banks will calculate the goodwill discounts based on each customer’s existing agreement, including the loan’s tenure and the early settlement date. (File pic)

PETALING JAYA:

 Banks will offer goodwill discounts to customers who opt for early settlement of their fixed-rate hire purchase financing from June 1, in line with amendments to the Hire Purchase Act.

Three associations representing banks said financial institutions have been given until March 31, 2027, as a transition period to make the necessary system enhancements to comply with amendments made to the Act.

The amendments abolish the Rule of 78 method to calculate early settlements as well as the flat interest rate structure for hire purchase.

The Rule of 78 is a calculation method to determine the interest rebate for early settlements of hire purchase loans, where a larger portion of the interest is allocated to the earlier installments of the loan.

“Until March 31, 2027, banks may continue to provide new hire purchase financing under the Rule of 78 method while updating their systems and processes.

“Nevertheless, some banks will also be ready to offer the reducing balance method during this transition period,” they said in a statement.

The statement was issued by the Association of Banks in Malaysia, the Association of Islamic Banking and Financial Institutions Malaysia, and the Association of Development Finance Institutions of Malaysia.

The associations said the relevant banks will calculate the goodwill discounts based on each customer’s existing agreement, including the loan’s tenure and the early settlement date.

The discounts extend to individuals as well as micro- and small-sized businesses with fixed-rate hire purchase deals signed before June 1 or during the transition period.

“At the point of application for early settlement, the customer’s account must not be in arrears exceeding 90 days; under legal action or issued with a repossession order; or under an existing restructuring and rescheduling or enrolled in a formal debt management programme,” theys said.

From March 31, all hire purchase financing will employ a reducing balance method with an “effective interest rate” to allow customers to understand the trust cost of the financing.

“These changes aim to empower consumers to make informed decisions and facilitate easier comparison of hire purchase financing products across banks,” the associations said. - FMT