[Q 357] Is Financing A Car Riba/Interest?

Question

Salam this is called interest but isn’t it the same as buying a car on finance instalments instead of paying in one large amount, both parties, the seller and the buyer have agreed to pay over monthly payments but at a higher total price. Is this interest?

بسم الله الرحمن الرحيم

الجواب بعون الملك الوهاب اللهم هداية الحق والصواب

Answer

The definition of Riba (interest) is that it is a profit that is not in exchange for anything and this profit is stipulated in the contract, e.g. lending someone money and receiving more in return or obtaining other benefits on the basis of that loan, etc.

When financing a car, which means to purchase the vehicle via deferred installments, there are two scenarios:

1. The price of the car is determined separately to the interest percentage, because the car is being purchased upon a deferred payment plan, i.e. a loan.

For example, the contract states that the car costs £10k, and an additional £2k must be paid over two years, making the total amount £12k.

This type of transaction is not permissible, as it is akin to Riba.

2. The car is bought on a deferred payment plan, yes, but the total payable amount is stated as the complete price of the car, even if this price is higher than the average market value. Such a transaction will be permissible.

For example, the car is bought for £12k and it is agreed that the payment will be made in installments over two years.

In this case, purchasing upon a deferred payment plan is not considered interest, because the price being charged is in exchange for the car itself and not in exchange for the loan.

However, if any impermissible stipulation is added to the contract, such as stipulating a penalty for late payment, then such a condition would render the contract impermissible.

It is stated in Hidayah:

لأن الربا هو الفضل المستحق لأحد المتعاقدين في المعاوضة الخالي عن عوض شرط فيه، ولا يعتبر الوصف لأنه لا يعد تفاوتا عرفا

(Al-Hidayah, Vol. 3, Pg. 61)

Imam Ibn al-Humam (رحمه الله) states:

فإن كون الثمن على تقدير النقد ألفا وعلى تقدير النسيئة ألفين ليس في معنى الربا

(Fath-ul-Qadir, Vol. 6, Pg. 447)

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