Major credit reform rolls out as 11 institutions adopt new hire purchase rules
PETALING JAYA: Eleven financial institutions and hire purchase providers will begin operating under Malaysia’s revamped consumer credit framework today, in a major reform aimed at scrapping long-criticised interest calculation methods and tightening protections for borrowers.
The rollout marks the enforcement of the Hire Purchase (Amendment) Act 2026, alongside the Hire Purchase (Charges and Terms) Regulations 2026, which together reshape how hire purchase agreements are structured, priced and administered in Malaysia.
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Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said the reform is designed to make the system fairer, clearer and more transparent for consumers, particularly those entering long-term financing agreements.
The Act, passed by Parliament last year, replaces key provisions of the Hire Purchase Act 1967, which has long been criticised for allowing practices that could disadvantage borrowers, particularly those who settle their loans early.
One of the most significant changes is the abolition of the flat interest rate method and the Rule of 78, two mechanisms widely used in the industry for decades.
“Under these methods, a large portion of early instalment payments is used to pay interest while only a small portion is allocated to reducing the principal loan amount.
“The new provisions introduce the reducing balance method and the effective interest rate for fixed-rate hire purchase loans. Under this approach, interest is calculated based on the outstanding loan balance, making early settlement more transparent and fair to consumers,” he said.
In simple terms, borrowers previously paid more interest upfront, meaning early settlement often did not result in significant savings. Under the new system, charges more closely reflect the remaining balance, improving clarity and accuracy in settlement calculations.
Armizan said the changes address long-standing public concerns over hire purchase financing practices.
“Before the amendment, among the issues frequently raised by the public were concerns over hire purchase transactions, particularly hidden interest charges and high outstanding balances even when borrowers opted for early settlement,” he added.
The reform also introduces wider digitalisation measures, including recognition of electronic signatures and online document submissions, aimed at improving efficiency and reducing paperwork.
At the same time, financial institutions will be required to implement enhanced due diligence procedures to verify borrower identity and reduce fraud risks.
For the first phase starting today, all 11 financial institutions and hire purchase providers are ready to comply with the new framework.
A second phase will follow in September as more industry players come on board. Institutions still upgrading systems have been given a transition period until March 31, 2027, although they are encouraged to adopt the new framework earlier.
“This legal reform reflects the government’s commitment to creating a more transparent and integrity-driven credit ecosystem, improving industry governance, and protecting the rights and interests of consumers nationwide,” he added.
Consumers have been advised to carefully review loan terms before signing any hire purchase agreement under the new regime, particularly as calculation methods have changed significantly.
