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 Under the new amendment, this outdated approach will be replaced with the Effective Interest Rate (EIR) and a reducing balance system — methods already widely used in modern financial markets to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.

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