Car Financing Under Islamic Banking

Current Scenario: The auto industry, especially in the United States, is in a downward spiral alright, and no one has a clue what’s in store for this industry. The same trend is noticeable in other parts of the world, including Japan. With the biggest names in the auto world like General Motors, yes GM, and Toyota bleeding non-stop, it is anyone’s guess how long these venerables of the auto industry can hold out against the market elements.

Time for Bargains: For the consumers though, especially those on the lookout for a good deal, many bargains are to be had for the asking! This may be the best time to strike the iron i.e. buy a Car! And there is any number of financing options available to bring that dream car of yours into the garage!

The Islamic Option: In this article, we shall take a look at the Islamic financing option for purchasing a car. Financing for purchase of cars under Islamic Banking is done under the contract of ‘Murabaha’. Simply speaking, this is a cost plus profit mark up contract.

Typically, the Islamic Bank or financial institution would have certain criteria to evaluate your creditworthiness and eligibility for a car loan, having regard to your income either from salary, or business i.e. your occupation, and other sources; your monthly expenditures, statutory payments etc, and finally your net income.

Now, suppose after going through the above process, the Bank gives you the good news-that you are indeed eligible for a car loan of USD 25,000.00 that you had asked for, to buy your dream machine. The next step would be to work out the profit mark up of the Bank on the loan amount. Suppose this works out to USD 5,000.00. That means the total cost of this deal, for you, is USD 30,000.00. Of course, the Bank would have factored its profit mark up while calculating your eligibility amount for the car loan. The other variation in the above case would be that the cost of the car is USD 20,000.00 and the profit mark up USD 5,000.00 or less as the case may be.

Apart from the above, other details to be worked out include:

  • Down Payment: Some Banks would require you to make a down payment for the car-that would increase your stake in your dream car, as well as bring down the amount/number of installments payable by you.
  • Repayment: The loan amount, plus the profit mark up, put together, would be divided into equal number of installments, agreed upon, say, 60 or 72 as the case may be, and you would be required to repay the same within the stipulated time. Some Banks offer a moratorium on repayment, that is, they allow you to start repayments after, say, two or three months after disbursing the loan. Some other Banks also offer to rework the installments after a part of the loan is repaid. Say you have repaid 12 installments. The Bank then works out a new EMI on the balance of the loan amount remaining after payment of the 12 installments. Upon full repayment of the loan, your car becomes really yours!
  • Add-Ons: In the increasingly competitive environment that the Banking industry is functioning, it is not unusual to get a few add-ons with your car loan – zero balance account, free/concessional insurance for the car, free advisory services in respect of the car loan, as well as other services on offer by the Bank, etc. Do avail of the freebies!
  • The Delivery!: Assuming that you have already identified your baby, that is your dream car, and the place that you wish to buy at, it is now the turn of the Bank to buy the car from the dealer on your behalf, and have it delivered to you!

Go on and Enjoy your Drive! Of course, there are no free lunches. Please do your due diligence before deciding to take a loan. And don’t forget that seat belt! HAPPY DRIVING!