Is the money factor in auto leasing halal?

Is the money factor in auto leasing halal?

A “lease” refers to a long-term rental contract wherein the rental amount and rental period are specified.
In this article I will attempt to answer the question: Is car leasing Halal or Haram? More specifically, is the finance fee many car lease contracts contain a form of riba and accordingly is it halal or haram for a Muslim to pay?

Is car leasing Halal or Haram?

Most Muslims, myself included, agree that renting and paying rent is permissible in Islam.
The Prophet (peace be upon him) lived in a time when renting was commonplace and people rented land and the prophet did not prohibit them from doing so. This is considered a form of implicit approval from the Prophet (peace be upon him) because the default state of all transactions in Islam is permissibility, i.e. everything is permissible except that which is explicitly prohibited.
There are some conditions for renting but generally speaking if its ok to sell a particular item, it’s ok to rent out the ability to benefit from using this item. A caveat to this permissibility is that benefiting from using the item should cause the item to no longer exist. So, for instance, you can’t rent out a bag of apples, because benefitting from these apples means consuming them. But you can rent out a piece of property or a car because you can benefit from using these items without causing them to no longer exist.  
So again, generally speaking, if it’s ok to sell an item, it is ok to rent out its benefits.
However, I have had a number of questions as of late regarding the permissibility of car leases in the United States (and perhaps elsewhere as well) since there is a charge that factors into the calculation of lease payments which on its face seems similar to interest and is often referred to as a “finance fee”.
So what is the “finance fee”? It’s a component charge found in auto lease payments.
Most cars a leasing company has to lease are bought on credit which means they are likely paying interest on the loan they took out to purchase the car and they need the lease payments they collect to cover the interest they owe. Typically, the “finance fee” is explained to customers as the money needed to cover the interest that the leasing company is paying on the car it is renting out to you. [1]
Now some interpret this “finance fee”, I suspect partly because of its name, as implying that there is interest included in the lease payments and therefore these payments are forbidden in Islam.
As I’ve explained in previous articles/videos, in order for riba to be in consideration there has to be financing. Sometimes the financing is clear like a loan of money while other times it’s hidden through granting an asset’s ownership to a customer before they’ve fully paid for it.
So now ask yourself: In the case of a lease, has a financing service been provided to the customer or did they purchase the right to use a car? Did the customer receive money when they signed the lease agreement?  Does the lease cause the customer to own anything they haven’t fully paid for? Answering these questions shouldn’t be difficult; The lease customer purchased the right to use a car for a limited period of time and they are paying for that right using their own money. The customer did not receive any amount of money, and the customer was not granted ownership of an asset they hadn’t paid for.
Therefore, without any financing, the question of whether or not there is riba can be easily answered; and that answer is plainly no.
Now, some may argue that the payments you are making to the lessor may not be interest payments per se but they are meant to cover the interest payments that the lessor owes. Therefore, aren’t you paying interest indirectly and having the lessor serve as the middleman?
The problem with using this logic is that it makes the purchase of almost any product imaginable a payment of interest.
Most businesses nowadays have interest expense and they use the revenue they generate from operations to cover this interest expense.
For example, when you make rent payments on an apartment you’re living in it’s very likely that your payments will be used to cover the interest on the mortgage the apartment owners have to make.
Similarly, when you purchase groceries at the grocery store it’s also likely that part of the store’s revenue is being used to pay off whatever interest expense the grocery store has to make.
I suppose a response to this would be to say, well if we’re not responsible for how a company uses our money after we make payments to it, are we allowed to purchase goods or services from a company that is involved in human trafficking for example? what about one that operates sweatshops and employs minors? In other words, where do you draw the line?
I’ve addressed this point in a previous article related to insurance but I think it bears repeating: Answering the question of what level of responsibility we bear regarding how our money is used after we’ve spent it is not an easy task. It is certainly not a question that I can answer for you. In these cases, there is no substitute for employing your best judgment and using common sense. However, what I can say is that this question is an entirely separate question from the question that I set out to answer in this article which is whether or not the finance fee in a leasing contract is riba. As I’ve mentioned, if the argument is that because the lessor is using the lease payments they collect to cover their interest expense this makes the lease payments a form of riba, then accepting this logic would make almost any payment for anything, riba. Consequently, this would make the concept of riba and it’s prohibition effectively meaningless.
Bottom line: When you make your lease payments you are paying the lessor a fee for the use of an asset which is in the lessor’s name, regardless of how this fee is broken down and explained. This is an Islamically recognized and approved transaction. You did not pay the lessor any interest nor do your payments become interest payments if the lessor uses their revenue to cover their interest expense.
Just to drive this point home further, suppose the lessor changes the name of all your rent payments and calls them “interest payments” and said that they were going to be used entirely to cover the lessor’s interest expenses. Does this have any effect on the permissibility of the rent payments you are making to the lessor? No.
As I pointed out in previous articles, just because someone changes the name of an interest-bearing debt product to something else doesn’t make it not interest. The reverse is also true. Just because someone chooses to give something a name that sounds a lot like interest, doesn’t make it so either.
However, I would advise you to ask about what money factor or finance fee the lessor is assigning to you in order to get an idea about how expensive the deal you’re getting actually is.
Often all you see shown on a lease contract is a “bottom-line” monthly payment figure after the calculations have been done by the dealer in the back office. So sometimes it’s hard to tell if you’re getting a good deal or not without asking what the component parts of your monthly lease payments are. Make sure you do this.

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