Halal car finance: Your complete guide
Halal or Islamic car finance is a way to spread the cost of a car with no interest being charged. But there are other costs involved...
- We explain how Halal car finance works
- What types of car finance are Halal
- Can you buy a car on HP with Halal finance?
If you follow a strict Islamic faith, then conventional car finance options are unlikely to work for you as interest and speculation won’t comply with your faith.
But there is another option in the form of Halal car finance, which skirts the rules to allow you other ways of buying a car in instalments without paying interest.
What many people don’t realise, though, is that Halal car finance isn’t notably cheaper than other ways of financing a car, as rather than charge interest on a loan or finance package,
What is Halal car finance?
Halal finance sees additional costs applied upfront – the cost of lending is added to the cost of purchase, to then provide an interest-free loan that complies with Halal protocols.
In some cases Halal car finance can actually work out more expensive and furthermore you’re usually required to pay a bigger initial deposit. Therefore, you need to carefully consider which type of finance best suits your faith and budget.
How does Halal car finance work?
Halal car finance usually takes the form of a personal loan. The lender buys the vehicle from a wholesaler and then sells it to the customer for a fixed price, using pre-agreed monthly payments over a fixed period of time. The purchase price of the car is the total amount of the loan, with no additional interest.
To cover this, brokers will increase the price of the vehicle to cover the total cost of lending. As the initial price of the car is higher, the deposit required is also bigger, as a car loan often requires a minimum deposit that is a fixed percentage of the car’s value.
What types of Halal car finance are there?
The most popular form of car finance in the UK – a PCP (Personal Contract Plan) – isn’t compliant with Halal beliefs, even though a PCP is typically the most flexible and affordable type of car finance.
PCPs offer low deposits and monthly payments versus the value of the car, with the chance to buy the car outright at the end of the contract by making a large optional final payment. However, because interest accrues during the life of the contract, a PCP isn’t a Halal option.
All is not lost, though. One option is to look at new cars available on 0% APR finance, which is used by many car manufacturers to entice people into showrooms.
This way, it is possible to pay monthly for a new car without paying interest as 0% APR finance is effectively interest-free.
In doing so, though, you are tied into buying a brand-new car and this will cost more than a nearly new equivalent would, even with interest.
You may not be paying interest with a 0% APR deal, but as new car list prices are much higher than used, even interest-free finance on a new car can involve higher monthly payments than other finance options on a used car. Importantly, that includes independently sourced Halal car finance.
Also, 0% APR finance deals aren’t always better value than alternatives that charge interest, as deposit contribution discounts aren’t included within APR figures – it’s sometimes possible for these discounts to outweigh the amount of interest charged.
Depending how you approach your faith, this may affect which finance options you want to consider.
Can I buy a car on Hire Purchase with Halal finance?
Yes, you can, providing the loan is arranged by an Islamic bank or by an approved Halal broker.
Hire Purchase (HP) enables you to spread the cost of a car across a deposit and a series of fixed monthly payments. At the end of the contract, you’ll own the vehicle.
It’s one of the oldest and most traditional ways of buying a car and can be applied to both a new or used vehicle, with the lender holding the option to repossess the car should you default on your payments.
Halal HP finance isn’t widely available, but interest-free credit Hire Purchase can be offered because you make fixed monthly payments that cover the entire cost of the car and for borrowing the money, and you are the owner of the car at the end of the contract.
Monthly payments for conventional HP are worked out by dividing the cost of the car (£20,000 for example), minus the deposit by the number of instalments.
Interest is added to the result (apart from in the case of interest-free credit offers), resulting in fixed payments for the entire term. If the total cost of interest were to add up to £2500, then you would end up paying £22,500 in total.
Halal finance works differently as interest cannot be charged, so is instead worked out as one price, based on the value of the car, plus the cost of supplying credit. If the total cost of the car and the credit were the same as the car above, that could add up to £22,500. The difference is that the £22,500 would then become the price of the car and you’d repay this amount in equal monthly instalments, with no formal interest being charged.
Deposits are usually slightly higher with Halal car finance as you’ll normally need to put down a bigger percentage of the car’s value for the cheapest deals.
With conventional Hire Purchase, this is based on the value of the car, so a 10% deposit on a £20,000 car would be £2000. But the deposit with Halal finance is calculated on the full loan amount, so you would need to pay 10% of £22,500 – £2250.
Can I lease a car with Halal finance?
Yes, you can. Because leasing doesn’t incur any interest, it complies with Halal principles – it’s effectively a form of long-term car rental and no interest is charged. You aren’t borrowing money for the car, but are paying a monthly amount for access to it instead. At the end of the contract, you simply return the car.
Because leasing and 0% APR contracts both set out how much you’ll pay in monthly payments over the course of an agreement, it’s well worth looking into these options to see if they suit your faith.
Penalty fees can be imposed with leasing, though, especially if the car is returned damaged or over its pre-agreed mileage limit. Late payment charges apply if you miss payments, too, with interest likely to be levied on the outstanding debt. An Islamic bank will normally pass these payments to charity to avoid receiving interest, but charges may still be issued.
Can I get a good deal with Halal car finance?
Yes, you can. As with all types of car finance, the cost of your monthly payments under Halal finance will vary depending on the car you choose and your credit rating, both of which will have an impact on your monthly repayments.
If you’re in a steady job and have a good income, along with a strong record of managing credit responsibly in the past, then you’ll be seen as a low-risk borrower and will get the best value finance options and lowest monthly payments. A large deposit will also cut your instalments, because you’re borrowing less.
