Dewan Rakyat Passes Hire Purchase Amendment Bill 2025, Introducing Fairer Loan Practices
Image Credit: BERNAMA
The Hire Purchase (Amendment) Bill 2025 has been passed by Dewan Rakyat, aimed at abolishing the flat rate and the Rule of 78 method for fixed-rate hire purchase loans.
Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali stated that the abolition of these methods was due to the systems being unfair and burdensome to borrowers. He explained that the move would replace the flat rate and Rule of 78 with the effective interest rate and the reducing balance method, which he described as more beneficial.
“The rationale behind this amendment is to ensure fairer monthly instalment calculations and interest charges that do not burden borrowers, particularly those wishing to make early loan settlements.”
“With the use of the effective interest rate, it enhances transparency in how hire purchase loans are assessed and marketed, allowing consumers to compare loan packages more accurately and efficiently,” Armizan said.
Elaborating further, Armizan explained that the reducing balance method would ensure that interest is charged only on the outstanding loan balance. This method, he noted, is particularly relevant for early loan settlements, unlike the previous system where payments at the initial stage were more focused on interest rather than the loan principal.
“The proposal related to the effective interest rate will benefit consumers by enabling them to compare the true costs of various loan types and financial products more accurately.”
“Secondly, consumers can plan their finances better as this rate shows the actual amount of interest to be paid over the loan period, and thirdly, it helps identify hidden costs, including compound interest, which could lead to mounting debt,” he added.
In addition to abolishing the flat rate and Rule of 78 method, the amendment also allows for the use of modern technology in hire purchase agreements and updates. The bill also proposes an amendment to Section 6B, relating to the adoption of a new method for calculating term charges, aimed at providing a time frame for owners to notify hirers of any changes to their financial obligations following a review of the effective interest rate.
According to The Edge Malaysia, hire-purchase providers will be given a grace period of 18 months from the date of the gazette notification to upgrade their systems before offering financing under the new reducing balance method.
Source: [1] BERNAMA, [2] The Edge Malaysia
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