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. That imbalance has finally and thankfully been shifted.

On 8 October 2025, the Dewan Rakyat passed the Malaysia Hire Purchase (Amendment) Bill 2025, marking the most significant overhaul of the Hire-Purchase Act 1967 in more than half a century.

Rather than making minor adjustments, the legislation takes aim at the foundation of the old system. What replaces it is clearer, fairer and designed to change the way Malaysians take on hire purchase loans.

The Rule of 78 Is Out and Transparency Is In

The bill’s journey through Parliament was remarkably swift.

The Dewan Rakyat conducted the first reading on 6 October 2025 and followed with the second reading and debate two days later, securing the bill’s passage that same day through a voice vote with bipartisan support.

Lawmakers across the aisle agreed that the long-standing Rule of 78 had no place in a modern credit environment.

Its continued use had become indefensible, especially when many other jurisdictions, including the United Kingdom, Australia and parts of the United States, had long abandoned it.

This legislative momentum came in the midst of a wider modernisation push. In the same session, Parliament also passed the Government Procurement Bill and the Parliamentary Services Bill.

Seen together, these developments point to a broader strategy to modernise Malaysia’s legal and regulatory frameworks, rather than isolated acts of reform.

Malaysia Is Turning the Page on a Quietly Unfair Practice

The heart of the amendment lies in how interest is calculated. For decades, Malaysian hire purchase loans have been governed by two mechanisms. The flat rate method and the Rule of 78.

Using the flat rate method, a lender first calculates the total interest on the original principal for the entire loan period. The lender then spreads this amount evenly across all monthly payments

A borrower who took an RM80,000 car loan would continue paying interest on the full RM80,000 even when their balance had fallen to RM20,000.

The Rule of 78 added another layer.

It front-loaded interest payments so that a disproportionately large share of interest was charged in the earlier months. For borrowers who wanted to settle their loans early, this meant a little to no interest rebate.

The system effectively penalised financially prudent behaviour and rewarded lenders with front-loaded income.

The new law replaces this structure with two globally recognised principles.

First, all hire purchase loans must now use the reducing balance method, where interest is calculated only on the outstanding balance for each instalment. As borrowers pay down their loans, their interest obligations decline accordingly.

Second, the amendment requires lenders to disclose the Effective Interest Rate (EIR). The EIR reflects the true annual cost of borrowing because it accounts for the loan’s declining balance.

This provides a clear and standardised metric that allows consumers to accurately compare different loan products, much as they do with housing loans.

The legislation takes apart a system that has been in place for decades and rebuilds it with fairness and transparency at its core, changing how Malaysians will deal with hire purchase loans in the years ahead.

Let’s see how the new Malaysia Hire Purchase Bill 2025 fares compared to the previous system:

Malaysians Are About to Get a Clearer View of Their Borrowing Costs

The Bill goes beyond interest reform and updates the Act to match today’s technological and financial landscape.

For the first time, the Hire-Purchase Act recognises electronic contracts and digital signatures, clearing up lingering ambiguities and enabling faster digital onboarding and documentation. This step is crucial for fintech-driven lending ecosystems.

The government has also introduced new regulatory guardrails. It now caps interest rates at 17% per annum for loans of up to five years and 16% for longer tenures.

Bank Negara Malaysia will use the Overnight Policy Rate as the benchmark for variable-rate loans, creating a clearer and more predictable basis for adjustments.

On the procedural front, lenders must provide clearer, timely notifications to borrowers regarding any changes to their repayment obligations, particularly for variable-rate products.

Together, these changes strengthen transparency and improve consumer protection throughout the loan lifecycle.

This Bill Fits Into Malaysia’s Bigger Consumer Credit Overhaul

The significance of the Hire Purchase amendment becomes clearer when viewed against the backdrop of the Consumer Credit Bill 2025.

Passed earlier in July, the Bill lays the groundwork for the Consumer Credit Commission (CCC), a new single regulator for all non-bank credit activities.

The government will then transfer regulatory powers to the CCC in phases over the rest of the decade.

By reforming the Hire-Purchase Act now, the government is standardising one of the most significant segments of the consumer credit market before folding it into a unified regulatory framework.

This strategic sequencing allows the CCC to focus on supervision and enforcement from day one, rather than starting by fixing outdated rules.

Who Gains and Who Must Adapt

The immediate winners are consumers, especially borrowers who settle their loans early, as they will finally receive fair interest rebates.

The use of EIR will give them a clear view of the true cost of borrowing, enabling more informed choices and better financial planning.

For lenders, the reform brings operational adjustments but not necessarily financial disruption. They have an 18-month transition to update systems, contracts and marketing materials.

Since Malaysian accounting standards already require financial institutions to use the EIR for income recognition, the reform will likely have a neutral impact on profitability.

What will change is how they compete.

Transparent pricing removes the advantage of opaque flat rates, pushing institutions to differentiate through service quality, flexibility and innovation.

The ripple effects will reach other industries as well, with automotive sales teams, long accustomed to selling based on low flat rates, all needing to retrain and adapt their messaging.

Auditors and tax professionals will benefit from greater alignment between legal and accounting frameworks, making their work cleaner and more predictable.

Change Has Arrived, but the Journey Is Just Beginning

Malaysia is using the Hire Purchase (Amendment) Bill 2025 to fix a decades-old imbalance and create a more transparent and equitable credit landscape.

The coming 18 months will be critical as lenders will need to prepare their operations, and consumers who are planning to take out new hire purchase loans may benefit from waiting until the new rules take effect.

Future reforms are already on the horizon with lawmakers having planted the seeds for automatic moratoriums, digital dispute resolution mechanisms and Shariah-specific provisions.

These will likely form part of the CCC’s regulatory agenda in the years ahead.

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.

Featured image: Edited by Fintech News Malaysia based on images by prostooleh and jcomp via Freepik.