Malaysia's hire purchase reforms to cut costs and protect borrowers by 2027
Malaysia's banking sector will introduce major changes to hire purchase financing from June 2026. The reforms aim to boost consumer protection and make loan costs clearer. Borrowers will see a shift from flat-rate pricing to a reducing balance method, alongside new rules for early repayments.
The overhaul follows the Hire-Purchase (Amendment) Act 2026, which removes the Rule of 78 method for early settlements. This outdated calculation often penalised borrowers who paid off loans ahead of schedule. Under the new system, those with fixed-rate agreements can still receive goodwill discounts if they settle early, provided they are not in arrears or facing legal action.
Banks will also phase out flat-rate pricing, replacing it with a reducing balance approach. This change means interest will be calculated on the remaining loan amount, reducing overall costs for borrowers. To help customers compare options, lenders must now display the Effective Interest Rate (EIR), giving a clearer picture of total financing expenses. The transition period runs until 31 March 2027, giving banks time to update their systems. During this phase, borrowers are advised to check whether their agreements use the new reducing balance method. They should also use the EIR to compare different financing deals before committing. The amendments focus on individuals and micro, small, and medium enterprises (MSMEs) with fixed-rate hire purchase contracts. Existing agreements settled early under the old Rule of 78 method may still qualify for discounts, but only if payments are up to date.
The reforms will take full effect by April 2027, with banks required to adopt the reducing balance method and EIR disclosures. Borrowers will benefit from fairer early repayment terms and more transparent cost comparisons. The changes apply only to hire purchase financing, with no direct impact on other loan types in Malaysia.
