Permissible and Impermissible Ways of Car Financing

18-2-2019 | IslamWeb

Question:

Is car financing halal

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Answer:

All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad is His slave and Messenger.

With regard to car financing and the like, there permissible ways and forbidden ones; what is important is the method how the transaction is concluded. Among the permissible examples for it is:

- The financing institution -whether it is a bank or otherwise -buys the vehicle and it enters into the ownership and guarantee of this institution, and the institution assumes the responsibility if the vehicle is ruined (or damaged) before it is delivered to them, and the possibility of returning the vehicle in cases of a hidden defect in it after delivery. After that, the bank sells it to the person who wants to buy it by installments at a higher price; this method is permissible.

If there was an agreement between the one who demands the car and the financing entity, then it should be as a promise only because the financing entity cannot conclude the sale contract on the car before owning it.

- Another permissible form is that the financing institution buys the car and then leases it to the person, were the lease ends by owning it. This is with the condition that the lease is genuine and complies with the Sharee’ah, as stipulated in the resolution of the Islamic Fiqh Academy (about the criteria for the permissibility in a lease ending with ownership contract):

1. The presence of two contracts that are totally separate and independent with respect to the time of their conclusion and in which the sale contract succeeds the lease contract, or the leasing company promises that they would enable the lessee to become the owner at the end of the contract period. In this regard, 'Option and Promise' stand on equal footing with regard to their legal status (i.e., as Fiqh rulings).

2. The lease contract should be genuine and is not just used to coverup for the sale contract.

3. The leased property should be guaranteed by the owner and not the lessee. In this sense, the owner should bear any damage that is not caused by misuse or negligence of the lessee. The lessee bears no liability if such damage has made the property useless.

One of the prohibited methods in this type of financing is: when the financing institution does not buy the car and does not own it, but it only pays the price to the provider [of the car] on behalf of the buyer, and then it gets the amount it paid from the buyer plus an additional amount.

This is forbidden and, in essence, it is a Riba-based loan that includes interest, and this is the practice of Riba-based banks. A Muslim is not permitted to engage in it due to the prohibition of Riba and its evil consequences in this worldly life and the Hereafter. Jaabir narrated that the Prophet said “Allah has cursed the one who consumes Riba (i.e. usury or interest), the one who gives it to others, the one who records it and the one who is a witness in it (its transaction).” He added: “All of them are equal (in sin).” [Muslim]

For more benefit, please refer to Fataawa 269986, 287773, and 321706.

Allah knows best.