Bank Negara Malaysia clarifies that the new Hire-Purchase Act allows both fixed and variable rate loans, while introducing the fairer reducing balance method.
KUALA LUMPUR: The Hire-Purchase (Amendment) Act 2026 will continue to allow providers to offer both fixed-rate and variable-rate loans to customers.
Bank Negara Malaysia stated that consumers will retain the option to choose between these two types of hire-purchase financing.
A key reform under the new act is the mandatory adoption of the reducing balance method for calculating interest on both fixed and variable rate loans.
Interest will now be calculated solely on the customer’s outstanding principal balance, which eliminates further charges once the balance is fully settled.
The central bank explained this change in a newly released Consumer Guide, noting that the need for early settlement rebates or waivers does not arise under this transparent system.
These clarifications follow reports that banks will introduce major amendments to hire-purchase practices when the act takes effect on 1 June 2026.
The forthcoming changes include the abolition of the widely criticised Rule of 78s calculation method and the flat interest rate structure.
As part of the transition, banks will offer goodwill discounts to eligible customers who early settle existing fixed-rate loans that currently use the Rule of 78 method.
BNM added that the act provides flexibility for consumers and providers to mutually agree on the calculation method, subject to the provider’s system readiness for the reducing balance method.
A primary concern addressed by the reform is the inequitable nature of the Rule of 78 method, particularly for customers repaying loans early.
The central bank noted that many countries have banned this method due to its inherent unfairness, aligning Malaysia with global best practices.
The Rule of 78 method frontloads interest payments, leading to higher initial costs and a larger outstanding balance upon early settlement.
BNM emphasised that the reducing balance method offers a more transparent and accurate reflection of the actual financing cost borne by customers.
This shift ensures fairer outcomes for consumers across the hire-purchase financing sector.
 The Sun Malaysia
