If you’re shopping for a car and trying to avoid interest-bearing debt it’s likely that advertisements claiming 0% APR (Annual Percentage Rate) car financing have caught your attention.
Naturally, the savvy Muslim consumer should ask: is there a catch to this and is it truly Halal?
If you’re in this position you’re in luck because I’m about to answer these two questions for you; keep reading…
Is 0% APR a good deal?
APR stands for Annual Percentage Rate and is typically used to measure interest rates or returns on investments.
In the context of buying a car, 0% APR simply means your debt is not increasing with time.
For example, if you are buying a $20,000 car with 5% APR for 5 years, you are going to pay a total of $22,645 over the 5 years for the car.
On the other hand, if you buy a $20,000 car with 0% APR for 5 years, you are going to pay a total of $20,000 over 5 years for the car.
So in our example, 0% APR is clearly more advantageous to the customer than a 5% APR since the customer is paying $2,645 less with 0% APR.
Lower APRs are more advantageous to customers than higher APRs when the principal amount is the same.
The question is: What if the principal amount is different?
Consider the following two choices:
Buy a $20,000 car with 5% APR in installments for 5 years.
Buy a $20,000 car for $22,645 with 0% APR in installments for 5 years.
Which is more advantageous for the buyer?
I’m here to tell you that the first option with the 5% APR is more advantageous to the customer because it gives the customer the option to pay less if they pay early.
For example, if the customer ends up paying off their debt in two years instead of 5, they will only end up paying $21,058.
On the other hand, with option 2, the dealership is predetermining the amount of profit it collects from financing so even if you do pay off your debt in two years instead of 5 you’re still going to be on the hook for $22,645.
One may argue, if it takes the buyer more than 5 years to pay off their debt they won’t accrue any additional interest which is an advantage of option 2.
If it takes the buyer more than 5 years to pay off the car that means they were late on at least one of their payments which means they’re going to get hit with late fees and if they continue to be late they’re going to wake up one day with the car missing from their driveway because it was towed.
Paying in instalments a higher price with 0% APR may actually be much worse than paying in instalments the cash price with an APR that is greater than 0%.
So before you go clamouring to the dealership that you want their amazing 0% APR offer, understand whether or not they’ve increased the price of the car on you.
0% APR can actually be more advantageous for the dealership and a horrible deal for the customer if the dealership increased the price of the car.
Is Paying a Higher Installment Price Halal?
If you understand what Riba is and you understand the anatomy of an installment payment then the question of whether it is halal to increase the installment price of a car becomes a rather easy question to answer.
First, let’s make sure we understand what Riba is:
The most widely agreed-upon definition of Riba, which I happen to agree with, is the following:
Riba is present in any loan of money where there is a contractual requirement of benefit to the lender.
A good example of riba is charging a fee in return for agreeing to wait to receive what is owed to you.
The most common form of riba is interest charged on debt.
I detail why this is the definition of Riba in Islam in previous articles.
Now let’s understand the anatomy of a purchase with installments.
From the seller’s perspective, the difference between making a cash sale and making an installment sale is that in the latter case the seller is agreeing to wait to receive their money.
So what does it mean that the seller is selling the same product for a higher price in installments?
It means that they are charging a fee in return for waiting to receive their money.
The fee they are charging in return for agreeing to wait to receive their money is the difference between the price in installments and the cash price.
This fee exactly fits the definition of Riba and is therefore Haram to charge.
Put differently, it is Haram to increase the price of an item because it is being sold in installments rather than cash.
Responding to Counter-Arguments
Counter-Argument #1: There is no loan of money
One may argue that no cash actually changed hands in the case of buying with installments and therefore there is no loan of money and therefore no Riba.
Response to Counter-Argument #1:
The existence of Riba does not require the borrower to receive cash.
When someone uses a credit card to make a purchase, the credit card company lends them money without any cash being deposited in the customer’s account.
Does anyone deny that interest charged on credit cards is Riba?
Counter-Argument #2: No interest is involved. Indebtedness doesn’t increase with time.
You can’t call the increased price in installments interest since indebtedness of the buyer isn’t increasing with time.
Response to Counter-Argument #2:
Listen, I don’t care what you call the increase in installment price. You can call it a Potato Salad for all I care.
What matters is that we are dealing with a fee that is being charged to the customer as compensation to the seller for waiting to receive their money.
This fee is Riba.
Counter-Argument #3: The prophet PBUH must have paid a higher price when he paid in installments.
There is authenticated records that show that the prophet peace be upon paid for things with installments. Therefore it’s safe for us to assume that he was paying a higher price in installments because why would any seller agree to sell in installments if they were not receiving a higher price?
Response to Counter-Argument #3:
There is absolutely zero proof whatsoever that the prophet PBUH agreed to pay an installment price that was greater than the cash price.
It is certainly not true that the only possible reason a seller would agree to sell in installments is if they were charging a higher price. It may be that the sale wouldn’t have happened altogether if the seller didn’t accept an installments purchase.
Counter-Argument #4: The opposite is certainly Halal.
Paying for something in advance of receiving it for less than its cash price is certainly permissible so shouldn’t the opposite be halal too?
That is, shouldn’t it also be ok if you are going to receive something today and pay for it in the future that you pay more in the future than its current price?
Response to Counter-Argument #4
When you pay in advance for something, the most you can receive is a perceived discount. An expected discount. However, there is no guarantee that the future price of the item at the time of delivery will actually be less than what was paid for it today.
On the other hand, when you sell something on credit for more than its cash price you are receiving a guaranteed profit for acting as a lender. This in Islam makes all the difference. Contractually requiring a profit for a financier in Islam takes the financing from being permissible to being prohibited riba because it puts undue pressure on the indebted in the case of loss.
Further still, in the case of purchasing something in advance of receiving it, there is no loan of money. The seller doesn’t have to deliver an amount of money to the buyer. Rather, the seller delivers the agreed upon product regardless of the current market value of the delivered product.
Final Nail in the Coffin…
There is a hadith with a very strong lineage of authentication which says:
((مَنْ بَـاعَ بَيْعَتَيْنِ فِي بَيْـعَةٍ فَلَـهُ أَوْكَسُهُمَا أَوِ الرِّبَا ))
“Whosoever makes two sales in one has the right to the lesser of the two prices or has charged riba.”
Many of the hadith scholars like ibn serene, imam Sufyan al-thouri, imam alnisaie…explain this hadith as referring to credit sales wherein the seller says the price is so and so if you pay in cash and it is a higher price if you pay in the future.
So are 0% APR offers halal or haram? Are they good deals financially?
It all depends on whether the seller has jacked up the price of the car or not.
If they have, the increase in the price of the car is absolutely Riba.
It’s likely to also be crummy deal financially as well.
The only real way to ensure that you’re not falling into riba or getting waxed when buying a car is to come to the dealership with your financing from a third party.
Never get your financing from the dealership itself regardless of whether they are claiming to offer a 0% APR or not!