I am planning to buy a brand new car (Honda) from the Honda dealership. The dealer has agreed to sell me the new car for $33,000. I would be paying $3000 as a down payment and would have to FINANCE the remaining $30,000 at 1.9% APR for 60 months (5 years) from Honda Financial Services (their own bank). The interest on this $30,000 loan for 60 months comes to around $1600 which dealer agreed (after explaining him about Islam and its prohibition regarding Interest) to add it to the cost of the vehicle and make it 0% APR (Interest-free). The interest amount would be less (around $900) if I take the loan for 36 months (3 years). Which means that I would be buying the car for $34,600 (33000 + 1600) and my down payment would be $4,600 and loan amount would be $30,000 (at 0% APR) which I would have to repay with $500 per month for 60 months.
Is this transaction valid as per Islam? If not then what are the alternative ways. Please advice. JazakAllahKhair.
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
If the interest amount of $1600 is incorporated in the selling price of the car and the car is sold at a flat rate, then it is permissible.
In the example cited by you, if $1600 interest is included in the sale price of $33000 and now the sale price of the car is $34600, then $34600 is considered as the full sale price of the car and not $33000.
It is not sufficient to merely include the interest amount in the sale price and regard it as one flat price. It is important to ensure that the implications of interest do not subsequently follow. For example, if there is a delay in the payment of the instalments, the purchaser cannot be charged interest on late payment. The seller will be entitled only to the final selling price of $34600. Another alternative is the Ijārah model, where the “purchaser” hires the vehicle, for example $500 a month for 60 months. In this case, the “seller” will be the “hirer” and retain ownership of the car. Upon 60 months or complete payment of the expected purchase price, the owner gifts the car to the hirer of the car. In both situations, there are positives and negatives for both, the potential “seller” and the potential “purchaser”. However, when one mode of transaction is adopted, it must be followed with all its implications.
And Allah Ta’āla Knows Best
Student Darul Iftaa
Venda, South Africa
Checked and Approved by,
Mufti Ebrahim Desai.