KUCHING: Malaysian borrowers will no longer bear the burden of front-loaded interest after the abolition of Rule 78, a decades-old formula that made early loan settlements costly and unfair.
Consumer Voice Association president Michael Tiong said the move marks a long-overdue correction to a lending system that has disadvantaged borrowers for decades, especially those with car and motorcycle loans.
“For years, Rule 78 governed how interest was calculated on hire-purchase agreements. It allowed lenders to collect most of the total interest during the early stage of a loan, leaving borrowers who settled early with only minimal rebates,” he told Sarawak Tribune.
He explained that under the system, a five-year car loan settled after just two years could see up to 70 per cent of total interest already paid, even though less than half of the loan term had passed.
“This system made early settlement costly and unfair, discouraging responsible borrowers who tried to repay faster,” he said.
He pointed out that the new reducing-balance method now replaces the outdated formula by charging interest only on the actual outstanding balance.
Tiong also added that as borrowers repay the principal, the interest automatically decreases, ensuring they pay only for the amount and period they actually use.
“This reform aligns Malaysia with international best practices and represents a major step toward financial fairness and consumer protection,” he said.
To help consumers understand the change, Tiong urged banks and hire-purchase companies to provide side-by-side comparisons between the new reducing-balance system and the old Rule 78 method.
He said loan documents should include simple examples showing how much borrowers could save when opting for early settlement.
“This transparency will help car buyers and borrowers to see clearly the difference in Effective Interest Rates (EIR) and prevent confusion if, during the transition, banks adjust rates in ways that make the new EIR appear similar to the old system,” he explained.
Tiong noted that displaying both rates and savings clearly would allow borrowers to detect any disguised rate increases and identify genuine benefits.
He also raised concern about the bundling of credit-life or loan-protection insurance, often made a condition for hire-purchase or car loan approval, particularly in the first year.
“In practice, such insurance is sometimes used as leverage to secure financing rather than as an optional safeguard. This limits consumer choice and adds unnecessary cost,” he said.
He stressed that borrowers should have full transparency and the freedom to choose any licensed insurer, rather than being compelled to buy the bank’s preferred product.
Tiong added that standardising early-settlement formulas, improving digital access to loan statements, and expanding financial literacy initiatives would further strengthen transparency and empower Malaysian borrowers.
“The end of Rule 78 is more than a technical change. It is a declaration that Malaysians deserve fairness, clarity, and real choice in every financial commitment,” he said.
“By ensuring open comparisons, preventing hidden rate hikes, and ending forced insurance costs, Malaysia will move closer to a lending system that truly protects and respects its borrowers, especially those financing cars and other essential assets through hire-purchase.”
