Islamic and halal car finance explained

  • Islamic car finance allows people to buy cars with 0% APR
  • Leasing is a viable alternative
  • HP and PCP generally not interest-free

Halal car finance, or Islamic car finance, is aimed at people following Sharia Law, a set of moral laws according to the Quran, the religious text of Islam.

It allows people to spread the cost of a car while following Islamic law.

Halal car finance is neccessary because interest (riba) is forbidden (haram) in Islam. Therefore people following Islamic Law cannot borrow money with an APR attached.

Don't think that halal car finance is a shortcut to 0% car finance. The amount you borrow is the cost of the car, plus the interest rate that the seller would have added for non-Islamic followers.

Halal car finance

How does Islamic car finance work?

There are several strands of Islamic finance, but Islamic car finance generally works on the basics of a personal loan, and is actually quite simple.

The buyer buys the vehicle from the seller. Instead of the seller making money by charging interest, the seller increases the price to cover the money they would have made by adding an interest rate. Because there is no interest rate added, it's Sharia compliant.

Deposit rates on Islamic car finance are generally much higher than traditional forms of car lending because they are based on the overall repayment you make, rather than just the car.

This works differently to conventional finance agreements. These typically charge an interest rate - a percentage charged on the total amount you borrow or save, which is typically paid for monthly.

Most car manufacturers don't offer Islamic car finance specifically, but there are a number of companies who specialise in it. Banks such as Lloyds TSB also provide Islamic bank accounts.

Islamic car finance

Halal car finance example

If you bought a car from a dealer for £10,000 on a Hire Purchase agreement with a 5% APR rate, you would pay in total £10,500 over the course of the agreement (assuming for ease that the agreement is over 12 months). £10,000 for the car, and £500 in interest.

Ford Fiesta Hire Purchase agreement

Price: £10,000
APR: 5%
Contract length: 12 months
Total cost to buy car (including interest) £10,500

With an Islamic agreement, the dealer would pre-load that £500 worth of interest on to the price of the car. So you would pay £10,500 (spread over a set of fixed payments) for the car, not £10,000.

Ford Fiesta Halal car finance

Price: £10,500
APR: 0%
Contract length: 12 months
Total cost to buy car: £10,500

Islamic car finance

Islamic HP finance

HP (Hire Purchase) spreads the car's cost across a deposit and a number of monthly payments. Once you've paid all of the monthly instalments, you own the car with nothing left to pay.

Traditional Hire Purchase agreements aren't technically available in conjunction with Islamic finance because interest is added to your monthly payments.

Islamic car leasing

Leasing (also known as Personal Contract Leasing or PCH) is an elegant solution to Islamic finance because it negates interest costs. You're not charged interest when you lease a car, you simply rent it. Therefore it is Islamic compliant.

Leasing payments are usually lower than Hire Purchase or Personal Contract Purchase payments too. Of course, you can't buy the car at the end of the agreement, so you'll never own it.

>> Search for car leasing deals

Islamic PCP finance

PCP (Personal Contract Purchase) contracts usually require a deposit (although don't always require it) followed by monthly payments. Should the customer choose, they can buy the car for a pre-agreed sum at the end of the contract term or simply hand it back

PCP finance agreements are unavailable with Islamic car finance, once again, because interest is added.

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