What is the Sharai ruling on the car financing in Canada based on the following condition:
I go to a dealer and the dealer is selling car X for 10,000 in cash or 200 dollar per month for 60 months. What if I ask them to change the contract in order to avoid interest and simply give me a total price of the car on installments be it 12 k CAD and the contract indicates that I need to pay installments for 60 months without any interest although I understand they will still imply late penalty charges which would be similar to credit card late payments.
In short the dealer gives me an increased price of car on installments VS cash.
What is the Islamic ruling in regards to this?
Bismillahi Ta’ala
Walaikum Assalam Warahmatullah
Before we address this query in specific, please review our standard response on Car Leasing & Financing at : https://fatwa.ca/car-leasing-and-car-financing/
It should be understood beyond a shadow of doubt that while employing different mechanisms to translate a sale into a financing mechanism, all the particulars of the respective mechanisms should reflect Shariah Compliancy.
Consider an example. Ahmed wishes to buy a pen being sold in the shop for $10. Ahmed only has $2 by him. So Ahmed tells the shopkeeper to to sell the same pen on deferred payment such that you pay $2 per week. The shopkeeper counters and say that if we are talking of a credit sale, then the price is not $10, rather $12. Ahmed accepts this counter-offer and gives $2, takes the ownership and possession of the pen. Over the next 6 weeks Ahmed will pay addition $10 and the sale would be concluded.
In this example the price has been inflated for Ahmed to buy the same pen at $12 instead. If Ahmed goes home and finds that the pen is broken and has to come back to return it, the shopkeeper will now be liable to return that $2 which Ahmed has put as initial payment towards a total of $12.
This shows that the price was factually inflated to $12 and not merely assumed to be part of the price of pen. This point of the inflated value becoming part of the actual commodity is extremely important for Shariah Compliancy of this trade.
Apply this to your example of car financing. The dealer wants to set the total price at $12k. In actual market, this may be reflected in different ways.
a. The additional amount actually inflates the price of the car, such that its value is now set at $12k. If the car is totaled, it would incur a loss of $12k. If the deal is canceled, buyer will recover his amount according to the $12k.
b. The (interest) price is brought upfront, marked as a dealer’s fee (or any such term), and the purchaser still has to pay the price of $10k over deferred installments. If the value of car is factually reflected in documentations, it will be $10k. The same goes for legal documentations etc.
If the contract with the dealer is set as per #a , then such a conceptual deal will be Shariah Compliant.
If the contract with the dealer is set as per #b , then such a conceptual deal will NOT be Shariah Compliant, and the additional interest paid upfront, or separate from the actual price of the vehicle will remain an interest (riba’).
The ideal would be to structure the deal as #a above. For that dealer will have to be the owner of the vehicle so he may sell it at a deferral. Or the dealer will have the permission from the owner of car company to sell at that higher price value for the vehicle, and then the documentation should reflect exactly that.
It is for this reason, merely conceptual shariah compliancy is not sufficient. A thorough reading of the full financing documentation is a must. This is what we request from anyone who approaches us to review their car-financing.
Conclusively, the inflation of the price at the time of setting up an offer should be factual inflation of the price, and not a ruse to make a facade of an inflation. All the lawazimat (necessitations) of that inflated price should reflect all other parts of the post-sale liabilities as well.
Wallahu A’lam
And Allah Ta’āla Knows Best
Mufti Faisal al-Mahmudi
Concurred: Mufti Mirza-Zain Baig, CSAA