Buying a Car on Installments With Interest
19-1-2000 | IslamWeb
Question:
What's the Islamic ruling regarding a person who wants to buy a car with monthly installments? There is no other alternative and the payments are subject to interest rates.
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.
There are many kinds of contracts based on monthly installments of cars, houses, commodities and the like. One can, for instance, buy a car from a given seller with installments that are agreed upon by both parties and where they define the amount, the number of installments and so on and so forth. It does not matter whether that amount is big or small, or whether it is the same as the price of commodities in the market or different from it.
Another form of installments is the one practiced by some Islamic banks, where the bank buys the commodities through its initial owner and then sells it to a given buyer by installments, which amount to more than the price of purchasing.
Both of these forms are allowed in Islam, unless the parties add a condition that is forbidden in Islam, such as paying extra amount for delayed installment payments.
The third form is the one practiced by usual banks, i.e. usury taking ones, because of the by-laws of these banks, they cannot carry out the transaction of purchasing and selling. So a person makes an agreement on a price of a car with its owner, then he asks this bank to pay its price in cash on behalf of him. And later on, he pays the bank back in form of installments with interest that are paid in advance or paid later. This form is prohibited in Islam, because the bank is giving a loan to its customer to pay it back giving more than what he had originally taken. No doubt, this is pure Riba (usury and/or interest). In addition to this, the bank demands another amount if a customer delays paying the installments. The difference between this form and what is practiced by Islamic banks is that the Islamic bank itself views the car, purchases it and possesses it. Thereafter, the bank sells it to its customer. If any damage occurs to the commodity before its selling, the bank will be responsible for it.
On the other hand, the usury-taking bank does not have any connection to the car, i.e. its procedure in brief is paying the price of the car, since it pays the price of the car in cash to its owner on behalf of its customer, then takes the price back with interest.
In the light of these details, one can realize the lawful and unlawful ways of purchasing cars and the like. So we advise you to be restricted to what is lawful and avoid what is unlawful.
Allah knows best.