How Should I Exit an Interest-Based Car Loan?

Question

I am currently paying for my car on an interest-based loan (PCP). I wish to exit from this riba-based transaction, but my only options are:

• To pay the total remaining amount and conclude the transaction;
• Return the car to the manufacturer without paying the final lump sum. However, they will value the car and effectively buy it off me, paying me a value representing the excess value of the car compared to what they are owed;
• Sell the car privately for an amount greater than valued by the manufacturer and pay off the manufacturer the remaining loan amount.

I will strive to avoid such loans in the future, but I wish to know if there is an ideal way to conclude it.

Answer

In the Name of Allah, the Most Merciful and Compassionate.

May Allah alleviate our difficulties and guide us to what pleases Him. Amin.

If you are (definitely) involved in a Riba-based transaction, your priority is to get out of it as soon as possible. If you need the car, conclude the transaction as soon as possible, and sincerely repent to Allah. The other options are valid if you do not need the vehicle.

According to Mufti Taqi Usmani: Finance companies often use the term “interest,” but it is not Riba as it does not fall into the Shari‘a definition of Riba. Suppose they offer you a contract in which you pay for the car in installments. In that case, they may use the term “interest,” but they offer two contracts: one to purchase the vehicle outright and the other to buy it over a period at a higher price, which they distribute over several months. Both arrangements are acceptable and do not contain any Riba. [Usmani, Fiqhi Maqalat]

Credit Sales

Selling a commodity at a higher credit price is accepted by all four Schools of Sacred Law. [al-Mawsu‘a al-Fiqhhiyya] They say that if a seller determines two different prices for cash and credit sales, the credit sale price being higher than the cash price, it is allowed in Sacred Law.

The only condition is that at the time of the actual sale, one of the two options must be determined, leaving no ambiguity in the nature of the transaction. For example, at the time of bargaining, it is allowed for the seller to offer the seller, “If you buy the car cash, the price will be 100,000. If you buy it on credit over 12 months, it will be 120,000”.

But the buyer shall have to select either of the two options. He should say that he would purchase it on credit for 120 000 over 12 months. Thus at the time of the sale, the price will be known to both parties. If either of the two options is not determined, the sale will be invalid [Shirbini, Mughni al-Muhtaj; Usmani, An Introduction to Islamic Finance]

Penalties

Another point must be noted above. If the seller imposes a condition that in the case of late payment, he will charge a penalty or interest, this is strictly prohibited because what is being charged is not a part of the price; it is an interest charged on a debt, and Allah knows best. [Usmani, An Introduction to Islamic Finance]

According to Mufti Taqi Usmani (may Allah preserve him), “The practical difference between the two (charging a higher credit price and adding a penalty or interest on late payments) is that the additional amount is part of the price and may be charged on a one-time basis only.

If the buyer fails to pay it on time, the seller cannot charge another additional amount. The price will remain the same without additions. Conversely, where the additional amount is not a part of the price, it will keep increasing with the default period.” [Ibid.]

I pray this is of benefit and that Allah guides us all.
[Shaykh] Irshaad Sedick
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Irshaad Sedick was raised in South Africa in a traditional Muslim family. He graduated from Dar al-Ulum al-Arabiyyah al-Islamiyyah in Strand, Western Cape, under the guidance of the late world-renowned scholar Shaykh Taha Karaan.

Shaykh Irshaad received Ijaza from many luminaries of the Islamic world, including Shaykh Taha Karaan, Mawlana Yusuf Karaan, and Mawlana Abdul Hafeez Makki, among others.

He is the author of the text “The Musnad of Ahmad ibn Hanbal: A Hujjah or not?” He has served as the Director of the Discover Islam Centre and Al Jeem Foundation. For the last five years till present, he has served as the Khatib of Masjid Ar-Rashideen, Mowbray, Cape Town.

Shaykh Irshaad has thirteen years of teaching experience at some of the leading Islamic institutes in Cape Town). He is currently building an Islamic online learning and media platform called ‘Isnad Academy’ and has completed his Master’s degree in the study of Islam at the University of Johannesburg. He has a keen interest in healthy living and fitness.