Islamic car finance, plus leasing and 0% finance options

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

BuyaCar team
Jan 21, 2019

Islamic - or Halal- finance is a way of spreading the cost of a new or used car that's compatible with the faith. It offers access to finance, while adhering to Islamic restrictions on lending with interest and speculating.

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.


Interest-free finance options

BuyaCar does not offer Islamic finance, but it is possible to buy a new or used car from the site using Halal finance that has been arranged separately.

There's also the option of paying for a car monthly without paying interest. Many new cars are available with 0% finance for either PCP finance or Hire Purchase (HP), which results in you owning the car at the end.

Another alternative is leasing a brand new car. 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.

Leasing and PCP finance agreements both set out exactly how much you'll pay over the course of the agreement, and guarantee that customers won't face further charges if the car loses value faster than expected during the agreement. 

Penalty fees are imposed if the car is returned at the end with excessive damage or mileage. Late payment charges apply too, with interest often charged on outstanding debt. These proceeds are kept by lenders. An Islamic bank would normally pass these payments to charity to avoid receiving interest.

We've outlined full details of all of the options below.


How does Islamic car finance work?

It's not possible to apply for an Islamic finance loan with BuyaCar, but you may be able to arrange this separately.

In general, Islamic finance takes the form of a personal loan. The lender buys the vehicle from a seller and then recoups the money by charging monthly instalments 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.


Getting a good deal with Islamic finance

Just like conventional finance, the cost of your monthly repayments under Islamic finance can 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 increase your chances of being accepted for finance and may reduce your monthly repayments. Putting down a large deposit will also cut your instalments.


Apply for finance

If you are looking for mainstream finance for a second-hand car, where interest is charged, then you can use the calculator below to estimate the amount you can borrow and apply for finance. BuyaCar is currently unable to offer Islamic finance quotes.


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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