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
Sep 7, 2020

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 payments 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 usually has to be larger, too.

Islamic finance doesn't offer the same range of options as conventional finance either. 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 nearly new or used car from the site using Halal finance that has been arranged separately.

Meanwhile, it is possible to pay for a new car monthly without paying interest; many new cars are available with 0% finance - which is effectively interest-free finance - with either PCP finance or Hire Purchase (HP), which results in you owning the car at the end.

Remember, though, that in financing a new car, you're likely to pay a significant premium - even compared to 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 - as cars lose value fastest when new, dropping in value more slowly as they get older - even interest-free finance on a new car can involve higher monthly payments than low-rate finance on a used car.

Another alternative that doesn't involve interest 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 have to return the car.

Leasing and PCP finance agreements 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 if the car is returned at the end with excessive damage or a higher mileage than agreed. Late payment charges apply too if you miss instalments, 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 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 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 finance and may reduce your monthly payments. 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 and are happy with interest being charged - remember that monthly payments are likely to be similar to 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, and so you don't have the flexibility that it offers.

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

At the end of the contract, there three options. One is to buy the car for a final lump sum - known as the optional final payment. In many cases - particularly with newer cars - you will be able to refinance this amount to spread the cost of the lump sum, which is calculated to be the approximate 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 PCP agreement. 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 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 payment is simply a rental fee. 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 HP finance

Hire Purchase (HP) finance enables you to spread the full cost of a car across a series of 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 and you are the owner of the car at the end of the agreement.

Monthly payments 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, though with no formal interest, 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.

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


Read more about:

Latest advice

  1. Car finance: who can be a guarantor?

  2. What is very poor credit car finance?

  3. What is bad credit?