:salam:
Let’s say a vehicle is worth $50,000 when purchased in cash, but when bought through bank on a 5 years monthly instalment contract, it costs $54000, is it haram?
I thought it was, until I watched this video.
Re: Vehicle instalment.
& Peace Prince Ali,
It means if i want to buy a cell phone but i dont have enough cash. I ask you to purchase it for me but you will sell it me with more cost then actual and on installment then it is not haraam
OR
You buy a mobile phone and then ask me if I would like to buy it on installment with more then actual cost and on installment then it is not haraam
Re: Vehicle instalment.
Buying/ selling for** profit** isn't haram in any business isn't haram, but any form of interest is haram.
Any loan from a bank, that is being re-paid in installments, has some sort of interest percentage attached to the monthly installment. Banks make their money through interest and fees.
The difference between the market value of a car and the asking price would be what the seller is hoping to gain in profit. But the difference in the selling price and total loan (after it's matured/ paid off), would include the interest that the bank charged you for loaning you the money.
I hope all that made sense.
Re: Vehicle instalment.
Exactly LKK & MM!
What I have learned is that bank buys your desired house/phone/car for you and then charge you their profit on top, so you are doing business with the bank.
Re: Vehicle instalment.
Peace Prince Ali,
I have no idea except that "interest" is haram.
Re: Vehicle instalment.
Exactly LKK & MM!
What I have learned is that bank buys your desired house/phone/car for you and then charge you their profit on top, so you are doing business with the bank.
Islamically, seller has every right to set an installment price which in total could be higher than the lump sum price. That means that if you buy a $500,000 house on installments of 30 years and end up paying $600,000 then its ok as long as both parties are in agreement (my opinion).
Re: Vehicle instalment.
My opinion is that it depends on legally what is being done. Let's look at 3 examples. All will use the standard definition of interest from hadith, as "Any loan upon which a profit is made".
Example 1 - Conventional car financing as done in the USA/Canada
You want to buy a car worth $25,000. The car dealership arranges a secured loan of $25,000 from the manufacturer's financing division. The car is your legal property from day 1, but the manufacturer can take it away if you don't keep up on payments. Essentially you have been lent $25,000 by the manufacturer, secured against the car, and pay it back together with a % on the original amount each month. I think that this is haraam as loan was made by the manufacturer to you, on which they made profit.
Example 2 - Conventional car leasing as done in the USA/Canada.
You want to buy a car worth $25,000. The manufacturer's finance division buys the car. You rent the car from them for 4 years for $3,000 per year (defined as $xxx + y % monthly) . At the end of the 4 years, you can choose to pay an addition $4,000 and buy the car, otherwise they keep it once your rental is over.
In this case, the manufacturer has not lent you any money, so there is no scope for interest. They rented the car to you at a pre-defined monthly amount. You have the option to buy the car for a lump sum after simply renting it from them. In this case, without a loan having been made, it seems legit.
Example 3 - Hire-Purchase agreements as done in the UK instead of conventional car financing
In the UK, the normal way to buy a car is through Hire-Purchase. In this case, if you want a $25,000 car, the manufacturer's finance division buys the car and then you make rental payments worth a total of $25,000 plus xyz %. At the end of the rental term, you can pay a nominal amount, say $50, to buy the car outright. Again, no money was lent to you. From a legal perspective, you never owned the car, you just rented it for a sum greater than the value of the vehicle. The only time you are actually buying the car is at a fraction of its value at the end of the rental term, for which no money is lent.
Again, without a loan being made, it seems legitimate to me as the hadith definition of interest cannot be applied.
Re: Vehicle instalment.
Since banks are not in the 'business' of buying and selling vehicles/phones etc, the transaction is essentially taking loan from bank and paying back principal + interest. Essentially it is same as taking out loan but named differently.
If the 'manufacturer's finance division' in above examples is a bank, then substance of transaction is same as taking out loan but form is different. A lot of people are happy with the form being Islamic, and I am not an expert on the Islamic definition.
In terms of economics/finance/accounting, the transactions would be treated same as giving out loan and receiving back principal + interest.