Why was the Rule of 78 method deemed unfair to hire purchase borrowers?

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The Rule of 78 Method Was Deemed Unfair Due to Its Front-Loaded Interest Charges

The Rule of 78 method was considered unfair and burdensome to hire purchase borrowers because it resulted in a disproportionate amount of interest being paid in the initial stages of a loan. This system prioritised interest charges over the repayment of the loan principal, particularly disadvantaging borrowers who wished to settle their loans early. The amendment to the Hire Purchase Act aims to replace this with more equitable methods.
Interest Charged on the Total Loan Amount Initially

Under the Rule of 78 method, a larger portion of the total interest was allocated to the early months of the loan repayment period. For example, in a 12-month loan, 12/78ths of the total interest would be charged in the first month, 11/78ths in the second, and so on. This meant that even if a borrower made payments promptly, a significant amount of their early instalments was directed towards interest, not reducing the actual loan amount.
Disadvantageous for Early Loan Settlements

This front-loaded interest structure created a significant disadvantage for borrowers seeking to settle their hire purchase loans before the agreed term. When a borrower decided to pay off the remaining balance early, the amount of interest they had already paid was higher than what would have been accrued under a system charging interest only on the outstanding balance. Consequently, early settlement often meant paying more interest overall than a borrower who completed the full loan term under a fairer system.
Shift Towards More Beneficial Calculation Methods

The Hire Purchase (Amendment) Bill 2025, passed by the Dewan Rakyat, abolishes the Rule of 78 and the flat rate system. It mandates the use of the effective interest rate and the reducing balance method. These methods charge interest solely on the outstanding loan balance, ensuring that borrowers only pay for the interest that has actually accrued on the remaining debt, making them more beneficial and transparent for consumers.

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Why was the Rule of 78 method deemed unfair to hire purchase borrowers?

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