Imposition of interest on deferred instalments for hire purchase loans is wrong in law

There has been confusion and anxiety among the borrowers following the announcement by the Bank Negara Malaysia on the requirement for hire purchase borrowers to officially confirm to take up the six months moratorium. On April 30, 2020, the Association of Banks in Malaysia (ABM) has issued a press statement, inter alia, stating the following:

“Hire purchase customers who choose to take up the moratorium will have an option in terms of their repayment. They can either choose to:

(i) Pay the accumulated six months’ deferred instalments together with their October 2020 instalment without being charged any additional interest; or

(ii) Continue the repayment of these instalments post-October 2020 through an extension of six months in the repayment period after the original maturity date. In this case, interest based on the contractual rate will be charged on the amount of the deferred instalments that remains outstanding until these instalments are fully repaid, which should be by the end of the extended six- month tenure (emphasis mine).”

It is in my humble opinion that the basis of the interest imposition by the banks is wrong.

Firstly, the six months moratorium would extend the original loan tenure in a hire purchase agreement for a correspondent period. To comply with the Hire Purchase Act 1967, hire purchase agreements have to be amended to reflect the extended tenure and the revised total interest.

Accordingly, the amount of interest for the moratorium period should be the difference between the total amount of interest based on the original tenure and the extended tenure. In other words, banks are only entitled to impose interest on the principal sum for the period of six months.

For example, the interest for the moratorium period of a hire purchase loan of RM50,000.00 with the flat rate of 3.00% per annum and a tenure of 7 years (or 84 months) is as follows: -

a) Total Interest (original tenure) = RM50,000.00 x 3% x 84 months

= RM10,500.00

b) Total Interest (extended tenure) = RM50,000.00 x 3% x 90 months

= RM11,250.00

c) Total Interest for the moratorium period = RM11,250.00 – RM10,500.00

= RM750.00

Instead of the above, the press statement issued by ABM revealed that the banks are to charge interest on the deferred instalments from the end of the moratorium period until the deferred instalments are fully paid.

There is no statutory and/or contractual basis for the banks to impose interest in this manner.

Secondly, banks are not entitled to charge interest on the amount of deferred instalment. It is known that the monthly instalment for a hire purchase loan consists of two components, i.e. the principal loan sum and the proportion of interest for the entire tenure of the loan.

By charging interest on the deferred instalment, the bank is effectively charging interest on interest. In other words, borrowers will effectively pay higher interest than the rate stipulated in the hire purchase agreement.

Thirdly, it is incorrect to state that the interest will be charged until the deferred instalments are fully paid. Unlike home loans which are calculated on a reducing balance basis, the hire purchase loan will not recognise the time a borrower settles the deferred instalments.

Even if a borrower pays off the deferred instalments soon after the moratorium period, the borrower is only entitled to a rebate of interest at the end of the loan tenure, which is substantially less than the interest which is imposed on the borrower.

Attempts to seek guidance from the BNM’s press release is unfruitful. The FAQ issued by Bank Negara on May 1, 2020, does not explain how the interest is to be calculated. To make the issue worse, it contains a confusing and misleading example in question six on the issue of interest for the moratorium period:

a) The example shows that there is a minor increase in the monthly instalment of RM19.00 post deferment. However, this is incorrect because by taking into account the deferred instalments of six months (RM4,272.00) alone, the monthly instalment will increase by RM71.20 for the remaining tenure of five years. This does not include the additional interest to be imposed on the deferred instalments;

b) There is no explanation on how the purported increase in total interest charges of RM1,130.00 is calculated. Even if we multiply the purported increase in monthly instalment of RM19 with the remaining tenure of five years (60 months), it would arrive at the amount of RM1,140.00, not RM1,130.00.

Given the issues highlighted above, it is urged that the relevant authorities and banks review the interest policy and to issue further guidance to clear the confusion. This is to protect the interest of millions of borrowers in Malaysia.

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VICTOR PANG is a practising lawyer. - Mkini