A car loan under a hire purchase (HP) agreement is a financing product where the borrower pays for a vehicle in installments while the lender retains ownership until the final payment. In Malaysia, these agreements are regulated under the Hire Purchase Act 1967. The car itself serves as collateral, meaning the lender can repossess it if payments are missed. Ownership transfers to the borrower only after the last installment and a nominal “option to purchase” fee (typically RM100–RM500) are paid.
Key features include fixed monthly payments, a deposit (usually 10–20% of the car’s value), and contract terms ranging from 3 to 9 years. Interest rates are predetermined, often between 3% and 5% APR, depending on creditworthiness and lender policies. Unlike leasing or Personal Contract Purchase (PCP), HP agreements have no mileage restrictions and always lead to ownership. Major banks like Maybank and CIMB, as well as dealerships, offer these plans.
What Is a Car Loan (Hire Purchase)?
How Does Hire Purchase Work in Malaysia?
The process begins with a down payment, followed by monthly installments covering the principal loan amount and interest. For example, a RM100,000 car with a 10% deposit (RM10,000) and a 5-year loan at 4% APR would require monthly payments of approximately RM1,650. The lender holds the car’s ownership certificate (grant) until the final payment.
Late payments incur penalties, usually 1% of the overdue amount per month. If a borrower defaults, the lender can repossess the vehicle after a 21-day notice period under Malaysian law. Borrowers may terminate the agreement early by paying at least 50% of the total loan amount, including interest, under the “voluntary surrender” clause.
What Are the Costs Involved in a Hire Purchase Agreement?
Total costs include the deposit, monthly installments, interest, and the final option fee. Additional charges may comprise insurance premiums (comprehensive coverage is mandatory), processing fees (up to RM500), and stamp duty (0.5% of the loan amount). For a RM80,000 loan, stamp duty would cost RM400.
Interest is calculated using the Rule of 78 method in Malaysia, which front-loads interest payments. This means borrowers pay more interest in the early stages of the loan. A 7-year loan could see 70% of the interest paid within the first three years. Refinancing or early settlement may trigger rebates or penalties, depending on the lender.
What Are the Pros and Cons of Hire Purchase?
Pros include guaranteed ownership, fixed payments, and no mileage limits. HP is accessible to borrowers with moderate credit scores, as the car secures the loan. Banks like RHB and Public Bank offer competitive rates for used and new cars.
Cons involve higher monthly payments compared to PCP, strict modification rules, and repossession risks. Depreciation may outpace payments, leaving borrowers in negative equity. For instance, a car valued at RM60,000 today might be worth RM30,000 in five years, while the loan balance remains higher.
What Are the Eligibility Requirements?
Lenders evaluate income, credit history, and employment stability. Minimum income thresholds vary but often start at RM2,000 per month. Self-employed applicants must provide six months of bank statements. A credit score of 600 or above is preferred, though some lenders accept scores as low as 500 with higher interest.
Documentation includes IC, proof of income (pay slips or EA form), and vehicle details. Foreign nationals may need a local guarantor. Loan approval typically takes 1–3 working days for salaried applicants.
What Happens If You Miss Payments?
Late payments incur fines and damage credit scores. After 21 days of non-payment, lenders issue a repossession notice. The borrower has 14 days to settle arrears before the car is seized. Auction proceeds from repossessed vehicles may not cover the outstanding loan, leaving the borrower liable for the balance.
Voluntary termination is possible after paying 50% of the total amount. The borrower returns the car but avoids further obligations. This option is less damaging to credit than repossession.
How Does Hire Purchase Compare to Other Financing Options?
Personal loans are unsecured but have higher interest rates (6–10% APR). PCP offers lower monthly payments but requires a large balloon payment to own the car. Leasing (Contract Hire) has no ownership option but includes maintenance packages.
HP is optimal for buyers prioritizing eventual ownership and predictable costs. For a RM150,000 car, HP’s total interest over five years might be RM18,000, while a personal loan could exceed RM30,000.
What Are the Legal Protections for Borrowers?
The Hire Purchase Act 1967 mandates clear contract terms, including APR, fees, and repossession procedures. Borrowers receive a 14-day cooling-off period to cancel agreements. Complaints can be filed with the Tribunal for Consumer Claims or Bank Negara Malaysia.
Lenders must provide a full payment schedule upfront. Any hidden fees are illegal. For disputes, borrowers can seek mediation through the Financial Mediation Bureau.
Can You Sell or Modify the Car During the Loan Term?
Selling or major modifications require lender approval. The borrower must settle the outstanding loan first. Minor changes like tinting or rims may be permitted but could affect resale value.
Insurance must cover the lender’s interest. Comprehensive policies naming the finance company as a beneficiary are mandatory. Claims must be reported to the lender promptly.
What Are the Steps to Apply for a Hire Purchase Loan?
Choose a lender, submit documents, and await approval. Dealerships often facilitate applications with preferred banks. Online platforms like Maybank2u allow digital submissions.
Upon approval, sign the agreement and pay the deposit. The lender disburses funds directly to the dealer. Registration and insurance are finalized before vehicle collection.