Kuala Lumpur, 20 October 2025 — The Malaysian Parliament has passed an amendment to the Hire Purchase (Amendment) Bill 2025, marking a major overhaul of how interest is calculated on hire-purchase (HP) loans. The amendment eradicates the controversial “Rule of 78” and flat-rate method for fixed-rate HP loans, replacing them with a reducing-balance model and requiring disclosure of the effective interest rate (EIR).
Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali explained that the previous system was “unfair and burdensome to borrowers”, particularly those who sought early settlement of loans. Under the old method, borrowers continued paying interest as if the full principal still applied, even when the outstanding balance had reduced.
What’s Changing
Key changes introduced by the amendment include:
- The reducing-balance method, meaning interest will be calculated only on the outstanding loan balance rather than on the original principal for the entire term.
- Mandatory disclosure of the effective interest rate (EIR), giving borrowers a clearer, standardised measure of the true cost of borrowing.
- Abolition of flat-rate and the Rule of 78 methodologies, which previously front-loaded interest and penalised early loan settlement.
- Implementation of digital and modern contract mechanisms, including recognition of electronic signatures and digital HP agreements.
Under the Bill, for instance, fixed-rate HP loans up to five years will be capped at 17% per annum, and those beyond five years at 16% per annum; variable-rate loans remain capped at 17%.
Why It Matters
For Malaysian consumers, the reform is significant. It ensures that:
- Borrowers who pay down principal early or settle loans ahead of schedule will no longer be unduly penalised by hidden interest charges.
- Loan comparisons become more straightforward, since the EIR provides a transparent benchmark across products.
- Financing behaviour may shift as consumers recognise more clearly how interest costs evolve over time, potentially improving financial planning and reducing indebtedness.
As Fintech News Malaysia observed, “Malaysian borrowers know that we’ve been paying more than what we should have on our car loans… The system that determined interest payments was not only opaque, but it was structurally tilted to favour the hands of lenders.”
What Lenders & Industry Must Do
Lenders and financial institutions will need to adapt:
- They have an 18-month transition period to overhaul systems, contracts and disclosure practices.
- Marketing materials must clearly display the EIR and use the reducing-balance method for all new fixed-rate HP loans.
- The change removes the “front-loaded interest advantage” that lenders enjoyed; competition is likely to shift toward service, flexibility and innovation rather than opaque pricing.
Broader Implication for Consumer Credit in Malaysia
This reform aligns with the wider agenda under the Consumer Credit Act 2025, which aims to establish greater oversight of non-bank credit providers, digital contracts and modern financing frameworks.
Consumer advocates view the change as overdue, a pivotal step in recalibrating the balance between financial institutions and borrowers in Malaysia’s credit ecosystem. As one commentary put it, “For the first time in decades, Malaysians won’t just be signing loan agreements. They’ll be seeing the numbers for what they really are.”
Next Steps
With the Bill passed, the focus now turns to implementation. Borrowers should examine any HP contracts issued during the transition period carefully, ensure the EIR is clearly stated, and consider early settlement where beneficial. Meanwhile, lenders must adapt systems for compliance and transparency as the 18-month grace period ticks down.
