Islamic car finance

Islamic car finance lets you spread the cost of your next car without paying interest - also known as Halal car finance

BuyaCar team
Mar 7, 2018

Islamic - or Halal- finance is a way of spreading the cost of a new or used car without being charged interest. It offers access to finance, while adhering to the Islamic restrictions on lending with interest.

This might sound like an excellent way to cut the cost of your car repayments but the amount you borrow is more than the market value of the car, and so it's rarely cheaper than conventional finance. In fact, it can often be more expensive and your deposit is usually larger too.

Islamic finance doesn't offer the same range of options as conventional finance. For example, Personal Contract Purchase (PCP) which offers low monthly payments, and allows you to return the car or buy it at the end, is not available.

However, you can get a car with lower monthly payments by leasing a brand new one. There's no specific Islamic option because this is a form of long-term car rental and no interest is charged. At the end of the agreement, which typically lasts up to four years, you return the car. We've outlined full details of all of the options below.

BuyaCar will be offering Islamic finance shortly. To apply, click below to find a car that you like and then apply for finance. When you're contacted with the result of your application, you'll be able to request a specific Islamic finance quote.


How does Islamic car finance work?

Islamic finance takes the form of a personal loan for the cost of the vehicle. Repayments take place over an agreed term.
Instead of charging interest, lenders significantly increase the price of the vehicle to absorb the cost of lending. As the price is higher, the deposit required is also larger.
In some cases, you may be able to secure the loan against your car, which means that it would have less of an effect on your access to other forms of credit (such as other loans). In this case, the lender could take possession of the car if you failed to make your repayments


Getting a good deal with Islamic finance

Just like conventional finance, the cost of your monthly repayments under Islamic finance will vary depending on the car you choose and your profile. if you're in a steady job with a good income, then you're likely to be seen as a low-risk borrower, which can reduce your monthly repayments. Putting down a large deposit will also cut your instalments.

In contrast, if you have a history of missed repayments, then lenders will assess you as a higher-risk borrower and increase your repayments.


Islamic PCP finance

PCP is not available with Islamic finance, and so you don't have the flexibility that it offers.

Under PCP, the monthly payments are relatively low because they don't cover the full cost of the car.

At the end, there three options. One is to buy the car for a final lump sum payment. In many cases - particularly with newer cars - you will be able to refinance the car to spread the cost of the lump sum, which is calculated to be the rough value of the car at the end of the agreement.

The second option is to hand the car back and walk away with nothing to pay. Your final choice is to trade the car in for another vehicle on a new PCP agreement. If the car you’re trading in is worth more than the lump sum cost to buy it, then the difference can be used as a deposit towards the next vehicle.


Islamic car leasing

If PCP is not an option and you're looking for a new car, then leasing may be suitable, particularly if you don't want to keep it for longer than four years. Monthly payments can be even lower than with a PCP agreement, but you will have to return the car at the end. 

You're not charged interest when you lease a car; your monthly repayment is simply a rental fee.


Islamic HP finance

Hire Purchase (HP) finance enables you to spread the full cost of a car across several fixed monthly payments. At the end of the agreement, you’ll own the vehicle.

Halal HP finance isn't available, but the way that Islamic finance works is similar, because you make fixed monthly payments that cover the cost of the car and of lending the money - you are the owner of the car at the end of the agreement.

Monthly instalments for conventional HP finance are calculated by dividing the cost of the car (£10,000 for example) by the length of the repayment period. Interest is added to the result, resulting in fixed payments for the entire term.

If the total cost of interest adds up to £1,500, then you would end up paying £11,500 in total.

Islamic finance is based on the value of the car, plus the cost of supplying credit. For simplicity, we'll assume that this adds up to £11,500. You'll then repay this amount, interest free, in equal monthly instalments.

Deposits are flexible, but you’ll normally need to put down a certain percentage for the cheapest arrangements. With conventional HP finance, this is based on the value of the car; a 10% deposit on a £10,000 car would be £1,000. But the deposit with Halal finance is calculated on the full loan amount: so you would need to pay 10% of £11,500 - £1,150.

In general, larger deposits lead to lower monthly repayments, so the larger deposit will be reflected in your monthly instalments.


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