The Dewan Rakyat has passed the Hire Purchase (Amendment) Bill 2025, officially abolishing the long-standing flat rate and the Rule of 78 in hire-purchase loan calculations — a move that promises fairer and more transparent financing for Malaysians.
The Rule of 78, a decades-old method, calculates interest based on the original loan amount, which means borrowers continue paying the same amount of interest even if they settle their loans early. Under the new amendment, this outdated approach will be replaced with the Effective Interest Rate (EIR) and a reducing balance system — methods already widely used in modern financial markets to ensure borrowers only pay interest on their remaining balance.
According to The Edge Malaysia, the EIR will now serve as the standard measure of the true cost of financing under a hire-purchase agreement. For fixed-rate loans, it will show the total financing cost over the term of the agreement, while for variable loans, it will be tied to benchmark rates set by financial institutions. The amendment also introduces new caps on interest rates: fixed-term loans up to five years will be limited to 17% per annum, while those exceeding five years will be capped at 16%. Variable-rate loans will remain at 17% per annum.
Financial institutions are now required to disclose the EIR upfront — both during marketing and before any agreement is signed — to ensure borrowers fully understand the actual cost of their loans. The Hire Purchase Act 1967, which governs consumer goods like motor vehicles with a permitted load not exceeding 2,540 kg, will continue to apply, but with updated definitions and mechanisms that reflect today’s financial realities.
Minister of Domestic Trade and Cost of Living, Datuk Armizan Mohd Ali, said the amendments represent a step forward in modernising Malaysia’s consumer credit landscape. He explained that the new framework complements the recently enacted Consumer Credit Act 2025 and aligns with the country’s ongoing efforts to improve borrower protection and financial transparency.
According to Armizan, these reforms aim to strengthen consumer confidence and make credit systems fairer for the public. He emphasised that the changes are not only about removing old formulas but also about integrating digital hire-purchase systems and updating financial references to match Bank Negara Malaysia’s Reference Rate Framework.
Financial institutions will be given 18 months from the date the bill is gazetted to update their systems and adopt the new reducing balance method. The bill was passed by voice vote following discussions involving 20 Members of Parliament.
However, some MPs called for a shorter transition period. Kota Melaka MP Khoo Poay Tiong argued that banks already use reducing balance systems for housing loans, suggesting that the implementation period could be reduced to between six and twelve months so that borrowers can benefit sooner. Bayan Baru MP Sim Tze Tzin also sought clarification on whether the Rule of 78 would remain in effect during the transition and how consumers would be informed about the calculation methods in use.
Armizan responded that the 18-month grace period was decided after consultations with key industry players and financial regulators but assured that the government remains open to discussions with Bank Negara Malaysia and the Ministry of Finance to explore an earlier rollout.
The approval of the Hire Purchase (Amendment) Bill 2025 marks a major milestone in Malaysia’s efforts to modernise lending practices, ensuring greater fairness, transparency, and consumer protection in the nation’s hire-purchase system.
