Background
The Dewan Rakyat (House of Representatives) has passed the Hire-Purchase (Amendment) Bill 2025 (“Bill”) on 8 October 2025. The Bill seeks to amend the Hire-Purchase Act 1967 (Act 212) (“HPA”), marking one of the most significant overhauls of Malaysia’s hire-purchase framework in recent decades.
The Bill is expected to come into operation on a date to be appointed by the Minister of Domestic Trade and Cost of Living, following its passage through the Dewan Negara (Senate), receipt of Royal Assent, and subsequent gazettement[i].
This legal update highlights the key changes introduced under the Bill.
Overview of Key Amendments
I. Introduction of the Effective Interest Rate
One of the notable changes introduced by the Bill concerns the method of interest calculation. Clause 5 of the Bill replaces the reference to the “annual percentage rate” with the “effective interest rate” (“EIR”)[ii], mandating that financiers compute interest on a reducing balance basis. Clause 20 of the Bill, which amends the sixth schedule of the HPA prescribes the formula for computing term charges based on the EIR. These reforms effectively phase out the flat-rate and Rule of 78 methods of interest computation traditionally used in hire-purchase transactions.
Briefly, the flat-rate method, applying a simple interest rate, calculates interest based on the original principal amount and distributes it evenly across all instalments. As a result, the interest portion of each instalment remains constant throughout the loan tenure, even though the outstanding principal reduces over time.
The Rule of 78 method, while similar in structure to the flat-rate method, goes a step further by front-loading interest payments. Under this approach, a greater proportion of the total interest is allocated to earlier instalments, with progressively less interest applied in later instalments.
The following table illustrates how the payment of interest for the same facility – RM50,000 for five years at 8% nominal interest – differs across the three methods:
| Method | Interest Year 1 (RM) | Interest Year 2 (RM) | Interest Year 3 (RM) | Interest Year 4 (RM) | Interest Year 5 (RM) | Total Interest (RM) |
| Flat-Rate | 4,000 | 4,000 | 4,000 | 4,000 | 4,000 | 20,000 |
| Rule of 78 | 5,800 | 4,800 | 3,800 | 3,000 | 2,600 | 20,000 |
| EIR (Reducing Balance) | 2,700 | 2,200 | 2,000 | 1,800 | 1,300 | 10,000 |
While the total interest payable under both the flat-rate and Rule of 78 methods is similar, the timing of interest recognition differs significantly. The Rule of 78 method accelerates interest payments to the earlier years of the tenure, whereas the flat-rate method spreads them evenly across all instalments. Both the flat-rate and Rule of 78 methods offer little incentive for early settlement, especially towards the end of the facility tenure, as the total interest charge is pre-allocated across the instalment period. Over the full tenure, borrowers ultimately pay a higher effective rate of interest than the nominal rate initially stated.
In contrast, the EIR method, which applies a reducing balance approach, results in progressively lower interest charges as the principal balance declines. This demonstrates how the EIR more accurately reflects the cost of financing relative to the outstanding balance at any given time.
II. Introduction of the Reference Rate
Clause 5 of the Bill updates the HPA by replacing the term “base lending rate” with “reference rate” as the benchmark interest rate. Subclause 2(c) of the Bill defines the
“reference rate” as the benchmark interest rate used to determine the pricing of variable rate financing facilities, where the benchmark rate is the published prevailing overnight policy rate as published in the Monetary Policy Statement of the Monetary Policy Committee of Central Bank of Malaysia.
III. Mandatory Disclosure of the EIR and Reference Rate
Clause 9 of the Bill introduces enhanced disclosure obligations on owners (financiers) with respect to the EIR and any applicable reference rate. In particular, where an owner revises the EIR under a hire-purchase agreement, the Bill requires the owner to provide written notice to the hirer at least fourteen days prior to the effective date of the revision. This notice must clearly state the revised EIR and the corresponding revised instalment amount or number of instalments.
IV. Recognition of Electronic and Digital Execution
The Bill also introduces a new Section 45A to the HPA pursuant to Clause 16 of the Bill, which expressly recognises the legal effect of electronic notices and documents issued under the HPA. Under this provision, a notice or document issued in electronic form shall not be denied legal effect, validity, or enforceability solely on the ground that it is in electronic form, provided that it complies with laws governing the use of electronic messages, such as the Electronic Commerce Act 2006.
V. Updated Repossession and Notice Procedures
Pursuant to the Bill, the recovery provisions under the HPA are amended to align with the introduction of the EIR framework, such that recovery is now capped at the outstanding balance. Clause 13 of the Bill, which amends Section 18 of the HPA, provides that the owner repossessing the goods is not entitled to recover any amount exceeding the balance outstanding under the hire-purchase agreement. Correspondingly, where the hirer repossesses the goods, the hirer may recover from the owner the difference between the value of the goods and the balance outstanding under the hire-purchase agreement, if any, at the time of repossession.
Clause 13 of the Bill also redefines “balance outstanding” to include the unpaid amount financed and term charges accrued up to the date of repossession, less any surrender value of insurance received or receivable by the owner. This ensures recovery is limited to the true residual amount due under the hire-purchase agreement.
VI. Due Diligence Requirement
Section 4 of the Bill introduces a new subsection 4B(1A) to the HPA, which requires the owner to undertake due diligence to verify the identity of the intending hirer and to maintain proper records of the due diligence process for a minimum period of seven years from the date of the hire-purchase agreement.
Conclusion
The Hire-Purchase (Amendment) Bill 2025 marks a pivotal step in modernising Malaysia’s hire-purchase framework. By introducing the EIR regime which effectively abolishes the flat-rate and Rule of 78 systems, the amendments aim to ensure greater fairness and transparency in financing practices.
Financiers should begin reviewing their hire-purchase documentation and pricing models to ensure alignment with the requirements once the amendments come into force.
We trust the above provides a useful update on the forthcoming reforms under the Hire-Purchase (Amendment) Bill 2025. If you have any questions or concerns about the Bill, please do not hesitate to contact us.
[i] Clause 1(2) – Hire-Purchase (Amendment) Bill 2025.
[ii] Clause (2)(b) of the Hire-Purchase (Amendment) Bill 2025 defines “Effective Interest Rate” as (a) a rate that reflects the actual finance cost of a hire-purchase in the case of a hire-purchase agreement where the terms charges are at a fixed rate; or (b) a rate that reflects the actual finance cost of a hire-purchase which is determined by using the reference rate as a benchmark in the case of a hire-purchase agreement where the terms charges are at a variable rate.
DISCLAIMER: This update is intended for readers’ general information only. It is not intended to be nor should it be regarded or relied upon as legal advice. Readers should consult a qualified legal professional before taking any action or omitting to act in relation to matters discussed herein.
