Is car finance halal?

Charging interest (riba) is not allowed under Sharia law, so some forms of car finance aren’t halal. But finance is available to Muslims

Gavin Braithwaite-Smith
Aug 14, 2020

Halal car finance - often referred to as Islamic car finance - enables you to purchase a new or used car, without having to pay cash, while adhering to the principles of Sharia law. However, care must be taken to ensure that the method of finance is compatible with the faith.

In Islam, money has no intrinsic value. A Muslim isn’t allowed to benefit from lending money or receiving money from somebody else. In other words, a bank or individual cannot charge interest (known as ‘riba’ in Arabic) when lending money. Renting an asset is permissible, but renting money is strictly prohibited in Islam.

This means that many traditional forms of car finance are not considered halal and consequently are not allowed. For example, a Hire Purchase (HP) agreement is off limits (unless it's an interest-free credit setup) because the lender will charge interest on the amount of money borrowed to finance the car. 

For similar reasons, a Personal Contract Purchase (PCP) plan is not halal because interest is charged by the bank or finance company - again, with the exception of interest-free credit options, which are typically only available on new cars.

That’s not to say that borrowing money to purchase a car isn’t halal. Here are some of the options open to you.

Halal car leasing

As renting an asset is permissible under Islam, halal car leasing is an excellent option for Muslims. Technically, someone leasing a car is renting it from the owner for a set period of time, so interest is not charged. At the end of the rental agreement, the car is handed back to the leasing company.

There are pros and cons associated with leasing a car. On the plus side, you have a clear understanding of how much the car is going to cost you each month and you don’t need to worry about depreciation (the amount of value a car loses over time).

On the other hand, you’re restricted to a pre-agreed mileage limit - exceed this and you’ll be charged a cost per mile - that could amount to thousands of pounds if you go way over the mileage limit you've selected. Then there’s the risk of damage. You’re expected to return the car with nothing other than 'fair wear and tear', in line with the the length of the contract and mileage allowance.

It’s also worth noting that at the end of the agreement you’re left with nothing to show for your money - unlike with a personal loan, where you own the car once you've made the final monthly payment. The leasing company retains ownership of the car and you don't get the chance to buy the car.

Halal personal loan

Islamic car finance can take the form of a personal loan. This is often called Murabaha, which is cost-plus financing, where the bank or finance company supplies the car at a price that includes a margin above the original cost.

In other words, the car might have a cash price of £20,000. It could be sold to you for an effective cost of £22,500, spread across a series of monthly payments. This means that you'd effectively pay an extra £2,500 to take the finance option, though as this premium isn’t classed as interest, this form of car finance is considered halal.

This means you’re paying more for the car than if you paid cash upfront, but you can reduce the monthly payments by putting down a larger deposit.

Paying cash

It sounds obvious, but paying cash for a car is an alternative to halal car finance. BuyaCar prices start from as little as £4,000, so you could find that the amount you might consider putting down as deposit on a personal loan could be used to fund an entire car. No interest, no repayments - you own the car from day one.

Here are some examples of the lowest prices on the BuyaCar website:

Renting a car

If you live in a city with excellent public transport, or you tend to use a car no more than once or twice a week, it might be cost-effective to rent a car when you need one.

Whether you need a car for a day, a weekend, a week or even a month, renting a car gives you the flexibility you won’t get when buying or leasing a car. You don’t have to worry about maintenance, depreciation or tax - just pay for the car when you need it, along with a little fuel.

Although it’s not possible to apply for halal car finance with BuyaCar, you may be able to arrange something separately or simply pay in cash on a more affordable car.

 

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