The Dewan Rakyat has passed the Hire Purchase (Amendment) Bill 2025 yesterday, which is aimed at abolishing the flat rate and the Rule of 78 method for fixed-rate hire purchase loans, reported Bernama.
The abolition of the flat rate and Rule of 78 is due to the system being unfair and burdensome to borrowers, minister of domestic trade and cost of living Datuk Armizan Mohd Ali said in his winding up of the debate on the bill, the report wrote. This system will be replaced with the effective interest rate and the reducing balance method, which would be more beneficial, he said.
“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.
The minister added that the reducing balance method ensured that interest was charged only on the outstanding loan balance, and that the approach was particularly relevant for early loan settlements when compared to the old system where payments at the initial stage were more focused on the 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,” Armizan said.
Apart from the abolition of the flat interest rate and the Rule of 78 method, the amendment also allowed for the use of modern technology in hire purchase agreements and updates, Armizan said when tabling the bill for its second reading.
In addition to removing the flat rate and Rule of 78, the amended bill proposed an amendment to Section 6B relating to the adoption of a new method for calculating term charges, which is aimed at providing a timeframe for owners to notify hirers of any changes to their financial obligations following a review of the effective interest rate, said the minister.
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