Do you want to get car finance but wondering, “is car finance halal?” Under Sharia law, charging interest or riba is not allowed. Most car finance deals charge interest so they are not halal. But that doesn’t mean you can no longer get financing to purchase the car you want. Car finance is still available for people who respect and want to follow Sharia law.
Can Car Finance be Halal?
Car finance can be halal. It is often called Islamic car financing. With this arrangement, you can buy a car of your choice without having to spend most of your savings on that one big purchase. Of course, you will still be able to follow Sharia law in the process. It’s a good idea to explore Islamic car finance if you want to buy a car and make sure that you are adhering to Sharia law.
Understanding Halal Car Finance
As you may already know, money does not have intrinsic value in Islam. Muslims are not allowed to benefit from or charge interest for lending money to another person. And this goes the same for financial institutions like banks, not just individuals. Riba or interest shouldn’t be charged when money is lent. While it is permissible to rent an asset, renting money is not allowed in Islam.
Most car financing arrangements are not halal because of the interests being charged when you borrow money from a lender to buy a car. So, if you want to get a Hire Purchase or a Personal Contract Purchase agreement, you should see to it that you get one with an interest-free credit arrangement. So, if most car finance deals are not halal, what are your options so you can follow Sharia law and still enjoy having your own ride?
Halal Personal Contract Purchase
For as long as the PCP deal is interest-free, it is halal. You can buy a new or used car that you like using this arrangement. Monthly payments for PCP deals are lower compared to Hire Purchase deals. It’s because the payments won’t be covering the full cost of the vehicle.
When your contract ends, you may return the vehicle or pay a final balloon payment to buy the car. You may also trade the vehicle for another one and start a new PCP contract with the financial institution of your choice.
Halal Hire Purchase
An Islamic Hire Purchase agreement will allow you to buy a car through monthly payments over a set number of years. Unlike the PCP agreement, you don’t have to pay a balloon payment. Once you’ve paid off everything, the car is yours.
The amount for the monthly payments for Halal Hire Purchase is based on the car’s value plus the cost of providing credit, which is not considered as interest. So, you would have to pay extra on top of the price of the vehicle. The total cost will be divided by the contract term or the number of months you’ll be paying the financial institution.
You may pay a deposit so that your monthly payments will be much lower. Usually, deposits are about 10% of the car’s value and the cost of giving you credit. So if the value of the car is £15,000 plus an extra of £1,500, then 10% of its total would be £1,650. You can pay more than the 10% that is usually required if you want. It will help reduce the monthly payment amount.
Halal Car Leasing
Under Islam, you can rent an asset because it is halal. You can have a car without breaking any law if you lease a car. With car leasing, you will be renting the car for a certain period, say a couple of years. And since you are paying rent for the car, no interest is being charged. When your lease contract ends, you simply have to return the vehicle, and that’s it.
Of course, there are advantages and disadvantages to car leasing. An advantage of this is you will know exactly how much you need to pay every month for the car. And since you’re not the owner of the vehicle, you never have to worry about the car’s depreciation or loss of its value over time.
A disadvantage of car leasing is that there are certain limitations such as your annual mileage. If you ever exceed it, then you’re going to have to pay the extra miles. You also have to make sure to take care of the car you’re leasing. Any unreasonable damage to the car once you return it would mean that you would have to cover the cost of repairs, as well as other expenses and fees.
Halal Personal Loans
There is an arrangement that will allow you to get financing to buy a car and also adhere to Sharia law. A halal personal loan can be used so you can buy the car you want. This type of personal loan is known as Murabaha.
This cost-plus financing means the finance company or financial institution will provide you with the car that you want at a certain price. The price will already include a margin on top of the original price.
If the price of the vehicle is £15,000, it may be sold to you for about £17,500 which you can pay monthly for a set number of years. Even if you paid extra for this finance option, it is not against Sharia law because it is not considered as interest. You can also reduce the amount you have to pay every month if you can pay a bigger deposit.
It is important to adhere to Sharia law if you are a Muslim. While it can be a bit challenging to find the right car finance deal for you that will allow you to follow the law, it’s not impossible. There are already many Islamic financial institutions in the UK that cater to Muslims who want to get car finance and enjoy the benefits of having their own cars.