The Dewan Rakyat has passed the Hire Purchase (Amendment) Bill 2025, introducing major updates to how interest is calculated for hire-purchase loans in Malaysia.

The amendment removes the old flat rate and Rule of 78, replacing them with the effective interest rate (EIR) and the reducing balance method to make loan calculations clearer.

How The Rule Of 78 Worked

Under the Rule of 78, total loan interest is calculated based on the original principal. Borrowers continue paying the same total interest even if they settle loans early, which means no savings from early repayment.

The new law abolishes this method to promote transparency and easier-to-understand repayment structures.

How The Interest Calculation Method Will Change

The amendment makes it compulsory for lenders to use the effective interest rate, or EIR, when calculating hire-purchase loans. The EIR shows the true cost of borrowing each year, giving borrowers a more accurate view of what they pay over time.

While the EIR is already common in housing and personal loans, this marks its first formal use in hire-purchase financing. For fixed-term loans, it reflects the total cost of financing; for variable-term loans, it is calculated using a reference rate set by the bank.

New Limits On Interest Rates

The government has set new ceilings on hire-purchase interest rates. Loans up to five years will be capped at 17% per annum, while loans longer than five years will be limited to 16%. Variable-rate loans remain capped at 17%.

Lenders must now disclose the EIR clearly when marketing or before borrowers sign any agreement.

Strengthening Consumer Protection

Minister of Domestic Trade and Cost of Living Datuk Armizan Mohd Ali said the changes are designed to keep the Hire Purchase Act relevant and aligned with current financial practices.

He added that the amendment supports the Consumer Credit Act 2025, forming part of wider reforms to make Malaysia’s credit system fairer and more transparent.

Digital Processes And Transition Period

The law also allows digital hire-purchase agreements and updates references to Bank Negara Malaysia’s Reference Rate Framework. Financial institutions will have 18 months from gazette notification to update their systems before switching fully to the new reducing balance method.

Calls For A Shorter Transition

While most MPs backed the bill, some argued that 18 months is too long. Kota Melaka MP Khoo Poay Tiong proposed reducing the grace period to six or 12 months, noting that banks already use similar systems for housing loans.

Bayan Baru MP Sim Tze Tzin also asked how consumers will know which calculation method applies during the transition.

Ministry To Review Feedback

Armizan said the timeline was agreed upon after consultation but that the ministry will consider suggestions to implement the change sooner, in coordination with Bank Negara Malaysia and the Ministry of Finance.

The bill was passed by voice vote after debate from 20 MPs.

What This Means For Borrowers

Once in force, the new system will make loan costs more transparent and fairer to those who repay early. It also brings hire-purchase financing, such as car and motorcycle loans, in line with modern banking standards in Malaysia.

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• TAGS:
• Effective Interest Rate
• EIR
• Hire Purchase Act
• Hire Purchase Loans
• Loan Interests
• Parliament
• Rule of 78