New hire purchase rules to benefit borrowers, minimal impact on banks

THE introduction of key amendments to hire-purchase financing practices under the Hire Purchase (Amendment) Act 2026 (HPAA) marks a significant move in strengthening borrowers’ protection, particularly for those looking to sell vehicles before their financing contracts mature, an economist said.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the changes would benefit borrowers who intend to trade in or dispose of their vehicles early, as the reducing balance method offers greater savings than the Rule of 78, which front-loads interest at the beginning of the loan tenure.

He said to some degree, it could help improve purchasers’ affordability.

 “Overall, it should benefit the banking industry by promoting fairness and justice for customers.

“Will it affect the banks’ bottom line? I would say the impact is negligible. On net, positive for the industries,” he told Bernama.

Meanwhile, CIMB Securities Sdn Bhd said the overall impact on banks and non-bank financial companies (NBFCs) is expected to be negligible, as guidance from most financial institutions (FIs) suggests that customers who opt for early settlement account for a relatively small proportion of the overall hire-purchase portfolio in any given year.

It noted that some of these FIs already offer financing packages based on the “reducing-balance” methodology; hence, there is little incentive for borrowers to switch from one financing package to another.

“Given that early settlements usually occur mid-cycle or closer to maturity, the quantum of unearned interest subject to potential’ goodwill discount adjustments’ remains limited and unlikely to be material for both borrowers and FIs,” it added.

Meanwhile, the Malaysian Automotive Association (MAA) said there is an urgent need to enhance public awareness and ensure consistent understanding of how interest rates are derived and how instalments are calculated under the reducing-balance method.

“Without sufficient clarity, the market risks inconsistent interpretations and potential miscommunication, which could undermine consumer confidence and, ultimately, impact vehicle sales,” it said in a statement to Bernama.

At the same time, MAA said the automotive industry continues to face gaps in understanding the proposed reducing-balance method.

It said that while monthly instalments may appear comparable, the effective interest rate under this structure can be higher than the current flat-rate regime.

As such, MAA underscores the need for the banking sector to conduct targeted engagement sessions to better equip industry frontliners with a clear understanding of the reducing-balance method, including how effective interest rates are derived and how instalments are calculated.

“While frontliners are generally well-versed in explaining fixed-rate financing, this may not yet be the case for the reducing-balance approach,” it added.

On March 15, Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali stated that the HPAA will take effect on June 1, 2026, with a transition period until March 31, 2027, for banks to perform necessary systems, processes and infrastructure enhancements.

According to Bank Negara Malaysia (BNM), under the HPAA, both fixed-rate and variable-rate loans will adopt the reducing balance method, in which interest is calculated on the customer’s outstanding principal balance.

The central bank said that once the customer pays off the outstanding balance, no future interest charges accrue, and hence there is no need for such a waiver or rebate. - March 18, 2026