Islamic car finance: interest-free leasing and finance options

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

BuyaCar team
Jan 19, 2022

Islamic - or Halal - finance is a way of spreading the cost of a new or used car that's compatible with the faith, allowing drivers to make the most of car finance deals while adhering to Islamic restrictions on money lending with interest and speculating.

This might sound like an excellent way to cut the cost of your car payments, but the truth behind these kinds of deals is that rather than the company charging the cost of lending money in the form of interest, you'll simply have to pay extra upfront, so it's rarely cheaper than conventional finance. In fact, it can often be more expensive, while you're often required to pay a larger initial deposit, too.

You also have fewer choices with Islamic finance. The option of PCP finance, which is generally considered to be the most flexible and affordable type of car finance with low monthly payments compared with the value of the car - and the chance to buy the car outright at the end of the contract by making a large optional final payment - is not available.

Interest-free cars

BuyaCar does not offer Islamic finance, but it is possible to buy a nearly new or used car from the site using Halal finance that has been arranged separately. Or, of course, you can choose to pay for the car with cash and avoid the need to borrow money at all.

Meanwhile, it is possible to pay monthly for a new car without paying interest; many new cars are available with 0% APR finance - which is effectively interest-free finance - with Hire Purchase where you make higher monthly payments but automatically own the car when the contract ends with no final lump sum to pay.

Remember, though, that you will almost always be paying more for a brand new car, financed or otherwise, compared to even a one-year-old equivalent. You may not be paying interest with a 0% APR deal, but as new car cash prices are typically so much higher than used alternatives - because cars lose value fastest when new, depreciating more slowly as they get older - even interest-free finance on a new car can involve much higher monthly payments than other finance options on a used car. 

Another alternative that doesn't involve interest is leasing a brand new car. This is effectively a form of long-term car rental and no interest is charged. At the end of the contract, which typically lasts two to four years, you simply return the car.

Leasing and PCP finance contracts both set out how much you'll pay in monthly payments 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 can be imposed with both leasing and PCP if the car is returned with damage beyond fair wear and tear or mileage above the pre-agreed mileage limit. Late payment charges apply too if you miss payments, with interest charged on the 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 the customer monthly payments over an agreed period.

Instead of charging interest, lenders significantly increase the price of the vehicle to cover the cost of lending. As the initial price of the car is higher, the deposit required is also larger, as finance often features a minimum deposit that is typically a proportion of the car's value.

Getting a good deal with Islamic finance

Just like conventional finance, the cost of your monthly payments under Islamic finance can vary depending on the car you choose and your credit 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 the best value finance options and may reduce your monthly payments. Putting down a large deposit will also cut your instalments, as you're effectively borrowing less.

Apply for finance

If you are looking for mainstream finance for a second-hand car and are happy with interest being charged - remember that monthly payments are likely to be similar to, or potentially lower than interest-free Islamic car finance options - 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, so you don't have the flexibility that it offers. However, interest-free PCP finance offers are sometimes available on new cars, and these may be suitable for you.

With PCP finance, the monthly payments are relatively low compared with the value of the car because they don't cover the full cost of the car. However, you also don't own the car once you've made the last monthly payment.

At the end of the contract, there are three options. One is to buy the car for a pre-agreed final lump sum - known as the optional final payment. In many cases - particularly with newer cars - you may be able to refinance this amount to spread the cost of the lump sum, which is effectively the predicted 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 (provided the car is in good condition and you've stuck to the pre-agreed mileage limit).

Your final option is to effectively trade the car in for another vehicle on a new finance contract. If the car you’re trading in is worth more than the optional final payment to buy it - this is known as having equity - then the difference can be used to put towards a deposit on your next vehicle, cutting your monthly payments.

Islamic car leasing

If PCP finance is not an option for you and you're looking for a new car, then leasing may be suitable, particularly if you only want to run the car for a couple of years and then hand it back. Monthly payments can be even lower than with a PCP contract, however, you will have to return the car at the end.

You're not charged interest when you lease a car; your monthly payments are simply a rental fee to access the car. However, you also won't be able to own the car at the end of the contract, so you'll have nothing to show for your monthly payments, either.

Islamic Hire Purchase (HP) finance

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

Halal HP finance isn't available though interest-free credit Hire Purchase can be available on new cars. The way that Islamic finance works is similar because you make fixed monthly payments that cover the entire cost of the car and of lending the money and you are the owner of the car at the end of the contract.

Monthly payments for conventional Hire Purchase 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 (apart from in the case of interest-free credit offers), resulting in fixed payments for the entire term. If the total cost of interest were to add 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. If the total cost of the car and the credit were the same as the car above, that could add up to £11,500. You'll then repay this amount in equal monthly instalments, though with no formal interest.

Deposits are flexible, but you’ll normally need to put down a certain percentage of the car's initial value for the cheapest arrangements. With conventional Hire Purchase, 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.

Larger deposits lead to lower monthly payments, so the larger deposit will be reflected in lower monthly payments.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.


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