The money factor in Car Leases, is it Riba?
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- เผยแพร่เมื่อ 15 ต.ค. 2024
- #LeaseHalal
Is leasing a car halal?
What are the different considerations when leasing a car in a halal way?
Let me know what you think in the comments!
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Disclaimer: Anything you hear in this video is an opinion. It is not to be considered personalized financial advice. Make sure you do your own due diligence before making any investment decisions.
Another great video. Jzk for trying to help Muslims navigate finances in these times. Your effort is much appreciated may Allah reward you
Blessed 1 thanks so much!
There is interest in it, don't just follow an opinion of someone just because you so badly want to leas a car, you will be responsible for not using your reason, this guy is not a man of knowledge, he is sharing his own views
Salaam brother. Thank you for addressing these topics in such a pragmatic and logical way.
Walaykum salam, my pleasure. thanks for the support!
Aleykum salam wa rahmatullahi wa barakatu, jazak Allah khayr.
Thank you now i am able to understand . May Allah swt. Bless u and give u all the best in your life. Allahumma amin
Thank you for the video. I believe the bank or the financial institution that approves and issues the lease ends up paying the car dealer the full amount of the lease term. And this occurs before the buyer begins making monthly payments to fulfill the lease agreement and amount. That being said, there are three (3) parties involved- The car dealer, the bank, and the borrower. And as a borrower, the bank wants interest or money factor from you. However, if the the bank or the financial institution is not involved and the car dealer decides to add their own profit rate, then as you said, it is not interest. And Allah Knows Best. Would love to you hear your input.
Bro you made a few mistakes here. When renting an apartment you rent an asset from the owner it’s clear it’s not the terms that are confusing it’s the process.
Take an example of BMW, BMW finance is who you pay your lease to not the bmw dealer who is a franchise who own the car. You go in to the dealer then they call the finance company to see if you’re approved, they want you to have the car, but the finance company decides, the finance company if they approve buys that car then rents it to you, if they buy the whole car and rent it which they seem to do it’s fine insh’Allah it’s theirs to rent, no loans, but if they pay the dealer for the depreciation, say 10k then you pay back 12k and the dealer still owns the car then the financial institute BMW has just lent you money and charged you interest, this is what has to be clarified, you haven’t fully understood the leasing process.
This is the major point, the dealer who owns the car DOES NOT lease it the company they call to see if you’re approved does, and they don’t own the car unless they buy the whole car not just compensate the dealer for the depreciation then charge you on top of that Allahu’Alim
I don’t see how the question of who owns the vehicle, the dealership or the finance company, has anything to do with what the lessee is paying for.
When paying rent, do you think it matters whether the house owner owns the property outright or has a mortgage?
You’re missing the point here brother and it’s a basic fundamental of riba from a fiqhi perspective, in all cases you don’t pay the dealership, you pay the finance company, the dealership is a franchise they don’t deal in finance.
So if the finance company pay the price of the depreciation on your behalf to the dealer but don’t take ownership of the car they have just basically paid the dealer money on your behalf, you then pay the finance company back for that loan, i.e. they pay the 3 year depreciation of 20k to the dealer you then pay 26k back to the finance company, that’s just 6k of riba, it’s a loan repayment not rent.
Conversely if the lease company cuts a check for the whole car which Insh’Allah seems to be the case most often they then own that tangible good, they are free to rent it to you as they wish for as much as they wish.
This purchase is the difference between you paying them back a loan as the car isn’t theirs to rent they are just loaning you the money by paying the dealer for the depreciation not for the car then charging you profit on that loan.
However if they are buying a car based on your agreement to rent it then there is nothing wrong with that hopefully.
Same in Islamic finance the finance company must physically take ownership of the good before they can sell it to you at deferred payment, that’s where the risk comes in, otherwise without ownership it’s just money for money Allahu’Alim
DeLaMan
In your example, the rent isn’t 20k it’s actually 26k and the owner of the car is selling their 26k of future cash flows to the bank for 20k. Which is certainly riba but has nothing to do with the lessee who is paying the 26k in rent regardless of who it’s owed to.
Bottom line: the owner of the car is still running the risk of resale value when the car returns. The lessee is still paying for the right to use the car.
Bro....I do get what you’re saying but for that to be correct would be depending on the contract.
For example if in the really really long lease papers you sign you agree to have that money paid to the dealer on your behalf then it’s a loan you’ve signed.
If you just agree to lease the car from them then it could be the case as you say their transaction is separate, it’s as if they have invested in the car or have rented it to rent to you but that contract would have to be studied.
The only seemingly “halal” mortgage I’ve seen sort of relies on this principle of separate contracts, but it’s not a simple issue.
With lesses so prevalent it amazes me no sheikh has looked at this in depth it’s actually got a lot of complexities. You are the only brother actually trying to delve into this, yasir qadari who is normally very thourough was asked but just scratched the surface. I leased a car myself but the dealer said the lease company purchase the car, so it’s fine insh’Allah, but I went through a lot of studying on it hence I know it’s not so simple.
But again for what you’re saying to be ok the contract would have to have no agreement that you take that depreciation amount of 20k and repay 26k because in that case it’s clear, Allahu’Alim.
The bottom line is look for a dealer who’s finance arm (and each dealer work with several finance companies btw) are willing to purchase the car and lease it to you in which case the problem doesn’t exist insh’Allah.
@@practicalislamicfinance Thank you very much for going into this topic. It's been nagging me for quite a while now. And for some background I am living in Germany and wanted to lease a car here. And was faced with the same question that you were faced.
However when i checked the details of the lease agreement for German dealers, they usually also involve a bank for financing matters. So the dealer remains the owner but the rent agreement happens between me and the bank. The bank would pay the depreciation to the dealer and would deal with me separately. In this lease contract between me and the bank: I see that there is an interest and I believe that since the bank is only renting out money to me with an interest, then bank is then in fact not sharing any risk (which you mentioned) and hence I see this as a problem.
If in fact the dealer would directly deal with me and write out a lease contract between me and him then I would not have a problem with this. But in Germany they always involve banks for such a lease agreement and you are dealing directly with the bank. Secondly there are some 0% interest leasing options that also go through the banks..maybe they are still permissible (but I am not sure, maybe you can elaborate).
Good explanation but what’s your opinion about late fee charges?
JZK for this video brother
MashaAllah brother nailed it. Just shows we have to look at the transaction and not the terms or wording used. The same way our 'so called' islamic banks use wording to hide riba, these car leases do the opposite and use the term interest except have no riba.
How could you say true Islamic banks are involved in riba when they are not LENDING money for profit?
Islamic banks buy the asset for you and resell it to you at a markup where you are allowed to pay in instalment.
Thats trading, not riba.
@@Emsyaz but that mark up is just covering the interest you’d be paying if it wasn’t bought out cash
@@taliyy_ bro, the point is, if they are not lending money for profit, its not riba.
The Islamic Bank must buy the asset first though before reselling it to you, otherwise its haram.
Assalam Alaikum,
There is some confusion for me in the terminology used here so i will explain in detail,
Leasing a house in India means,
the Tenant pays the Owner a lump sum amount and makes a contract for 5 years or so,
During the period of which the Tenant will not have to pay rent to the Owner except a very small amount (about 1/th of rental value in the market) every month.
And at the end of the contract period, the Owner pays back the whole Lump Sum amount back to the Tenant (considering no damage was done to property)
The Lump Sum is usually 100 times the rental value in the market.
(Ex: ₹20k is average rent and lease amount is ₹2000k or ₹20 Lakh)
Please tell me whether such an agreement is allowed in Islam.
Salam, I had a quick question the money factor or rent charge goes to the The lender, i.e. Toyota financial rather than the dealership in this case does that mean that they are actually profiting the money predetermined as a fixed rate versus the dealership making that money extra for renting/leasing out the car? I think if this distinction is made, then will clarify, I’ve always leased and the fact that you cannot pay down, the principal versus interest made sense to me that I’m not being charged interest
Salam alaykom brother
What about lease purchase a vehicle.
Example $8000 car
Fix $1000 for 8 months
Thank you
Can be specific
Is the mercedes agility financing permissible
Jazakallahu khairaa
If the lessee earns revenue with the leased car or truck, then it should be even more halal.
The contract need to be clear and free from ambiguity.
Prime Inc trucking have two types of lease:
1. Standard Lease: The lessee leases the truck for three years and pays weekly rent. No down payments. The drivers earn revenue. At the end of lease, the lessee turns in the truck and receives termination pay as a reward.
2. Lease Purchase: Lessee leasesbfor three years, but buys in the end. There are down payments upfront and once a year. No buyout price/balloon payment in the end.
Such contracts are not ambiguous.
If the terms are ambiguous then it might be haram like drop shipping.
fine and good but what if the car brand is using a bank for leasing ?
Good video but the main difference between the home leases and the car leases
which brings the question of Riba is that the price of a house or an apartment don't depreciate after 1 year or 4 year of the lease but a car does.
After 1 use a car becomes "used car" and price goes down and at the end of 3 or 4 years lease the same car price goes down by almost half.
so when the borrower returns the car back, the car company can't rent the same car at the same price any more where as a house or an apartment you can rent it out at the same price or even more so for the car companies have to find a way to cover that loss, so sometimes they get finance for that lease money from a bank and the borrower’s payments go to the bank for that lease term.
so there is little difference and difficulty here and that is why there is the Riba issue in leasing a car but not leasing a house or apartment.
Basically you said: Cars depreciate. Lease payments cover depreciation.
This doesn’t mean there is riba.
@@practicalislamicfinance Yes that's right, that doesn't automatically mean there is riba but I just pointed out this issue and the difference which is the source that brings the issue of riba where as in other leases this problem is not there. So if this depreciation is not handled by the car companies, instead covered by loan or insurance by a third party or Bank then it becomes a discussion of riba or not.
@@alhamdahmed389 not sure what you mean. Are you saying that because the leasing company has loans with a bank that the customer's payments to the leasing company are in fact loan payments to the bank and not lease payments to the leasing company?? if so, this would apply to apartment leases as well.
Classic cars appreciate and downtrodden homes depreciate.
How does this make sense. The fee is the fee for the money used for the lease. If you paid your entire lease upfront you money factor would be 0 you’re paying for borrowing money not the car
Brother Rakan, in Canada it is called borrowing cost i.e. interest..the monthly payment is calculated based on the total car value (borrowed money) plus interest rate over the lease period of time. The monthly payment cahnges dramatically based on the lease period due to the interest factor and you have to pay all damages and consumables. Therefore, I cannot agree with your analysis
this is one of the few instances where I will go against the naming. Even though they do call it interest, it is not the type that corresponds with riba. I could be wrong though.
If bank finances a car on fixed rate and after transfer of ownership to purchaser bank marks lien/hypothication till loan is fully repaid. Is it halal?
Further the purchaser also pays the insurance for that car.
It's Haram because the bank [ third party ] is taking the interest or the extra money or whatever you want to call it. As I understand from what it said in Islam
The bank does not take the rental company’s profits unless the bank is actually leasing the cars itself which is something I haven’t heard of. You may be referring to the fact that the leasing company has likely borrowed from the bank to pay for its cars but pretty much all businesses have a relationship with at least one bank and have borrowed from that bank and pay that bank interest. The question is what are you paying for.
@@OwlyEagle dude you’re not paying interest to anyone. You’re paying to use a product (car) for a certain amount each month for a period of time. If a dealer is paying interest to a bank behind the scenes, this has nothing to do with you. No need to confuse people man
Greetings from Bangladesh
Want to thank you for another great video as always
I had a question about any kinds of damage that may occur upon the asset, who should be liable for paying it. (the accident is neither the leasee's fault nor the lesaor's fault and is not covered by insurance either)
Also in case of renting a piece of land for cultivation and let's say there is a natural calamity (not covered by insurance) and my crops gets destroyed. Should I still be liable to pay the rent or will it be non permissible me to pay rent on the land.
Thanks Muhammad, my pleasure.
For your first question, this is a detail that needs to be spelled out in the leasing contract.
As for your second question regarding land, yes you should pay rent on the land if your agreement with the land's owner is a rental agreement. However, it would be wiser not to rent farm land but rather agree with the land owner to give them a percentage of the profits you make.
Practical Islamic Finance
That's the thing you see
The contribution of the land in my business venture is to be able to accommodate my seeds and let them grow uninterrupted
But if the land owner is not able to "make good" on his contribution aka providing me with a sustainable land for me to be able to grow my crops, then why should the leasee (me) be obliged to pay rent
The only contribution the land owner is supposed to make is give me a land (able to produce crops),is not being fulfilled
What I'm trying to say is that if you were given a piece of equipment for the production of a certain product and the machine broke down in the middle of the production, you shouldn't be liable to pay rent until the leasor fixes the machine(the asset) because the contribution to the business that the leasor is making is just the machine
Think of that in this way you and I started a business(a venture that soley requires our time only, no capital ,for arguments sake) together. Now one day I came up to you saying "hey man, I saw this new automated sales robot, would you be cool with it if this robot took my place" Being my business partner you replied "well sure man, as long as it's (the robot) doing the job you were doing then I'm fine with it"
So if the robot broke down for a day and hinders it's Service, wouldn't it be such that as if I were not present and my contribution of the business for the day were let's say absent or nonexistent.
A deal must be fair to be Islamic and riba was declared haram for the same exact manner.It would seem that the money borrowed was used to finance a business but even if the business went sideways, the borrow was obliged to pay interest.As this was unfair the ruling came that riba was haram. With renting asset can you tell me the difference? It sure seems a lot like riba.Instead of money I'm just buying an asset for my borrower and charging a "profit" regardless of how my contribution (machine/land etc) is performing in the business.
Yes if my machine/ land (as a leasor )was performing accordingly and the contribution of the leasee was not enough to make overall profit from the business even then the leasee should be obligated to pay rent. Because the his contribution fell short (may it be for securing a contract for production or sale of goods)
I always ask people to judge in determining if a financial instrument is halal or not by looking at it from a contribution perspective.
Looking forward to hearing your reply
May Allah SWT save us all from haram, only he knows best.
You can rent a piece of land from a landowner, have that piece of land precisely defined and then live with the results as a renter. However, if you are only going to pay the landowner if the land performs as you expect then again you're not renting, you are in a profit and loss sharing arrangement and that needs to be defined in the contract.
I guess car hire and car lease are 2 completely different things.
In Australia, a 3rd party company (a finance company) purchases the car, transfers in your name, puts together a 5 year contract where you are leasing the car. But still interested in calculated into the payments. This is completely different to leasing a house. The car normally will get purchased from the dealership by the finance company. It's not leasing from the car dealership anymore.
A simple question to ask "if I don't pay my repayments who will chase me?" Will tell you alot.
Also the purchase of car lease is mainly for business use, because by using the word 'lease' allows you to claim as a business expenses. That's why normally you need a business registration to apply for car lease.
Like I have been told, same process just different wording in the contract to benefit business so the vehicle becomes a expense and not an asset to the business.
Also your forced to insure the entire car just Incase something happens.
This is my understand, but I'm from Australia, may be different
But in Australia a 3rd party company always buys the car and your contact, even though prepared by the dealership is with finance company. The dealership has made the money from the purchase and the finance company will benefit from the lease payments.
Have you gained anymore insight into this since this comment? I'd like to do a novated lease on a car in Australia but the way you broke it down makes me inclined to think it's not permissible.
Car rental is what you are referring to in your assumption. Lease agreement is totally different issue
aren't leases long term rentals?
What If the finance company buys the car from the dealership?
When leasing a car, do you then have the possibility to buy it at the end of the contract or is this haram ? Should you keep leasing ?
If purchasing the car is an option it’s halal. If it’s a requirement, it’s haram.
So then isn’t a traditional mortgage where bank gives leases you an asset (house) and requires monthly payments on that asset Halal?
The way I understand it is this....bank lends you money to buy the house and you pay interest on that money whereas car dealerships lend you the car and charges you a predetermined amount (unlike houses where interest rates changes over the years). You return the car at the of the term with the option to buy the car at its present value.
@@jlahmed well house is same with fixed term mortgage rates. Set amount for a period of time. If you stop paying you lose the house, that’s the collateral. They are only giving you loan based on house, mortgage is not traditional riba loan from what I understand from this channel. I wish more scholars who understand our complex economic systems would really deep dive into this.
@@afzalshaikh2128 no there’s a difference from how i see it at least. For a house, you are paying interest on the money borrowed to buy house. Whereas in a car lease, you are paying dealership to borrow the car and then return it.
@@taliyy_ No you are not you car making payments to the car leasing company which is a banking because they let you borrow money. Follow the money!
@@afzalshaikh2128 when you lease you don’t borrow any money and also it could be thru dealership no 3rd party
Not entirely correct.
The interest income you refer to is a reflection of interest liability towards the bank as most leasing companies are merely agent.
You can read leaseplan financial statements
The real income comes from difference of residual income and actual sale value
This is also different from rent a car or rent a home because most operating leases are two to three years only and financed by bank only meant for you. Once you return it's imideatrly sold out in the market
It's not never an inventory item. The entire interest bearing transaction is generated entirely meant for you.
What about the “money factor” which is used to calculate the interest portion on your monthly payment.
How it is calculated is less important than what you are actually paying
Just a question Let's say you crash the car: you're still liable for the whole car price . This means it not really risk sharing. The dealer is guaranteed profit
If you crash the car, then you're responsible for it. Just like you're responsible when you damage someone else's car. But a more interesting question would be: Let's say your car gets washed away in a flood/hurricane along with all your property. Are you still responsible for it?
Hi, need help in understanding the prizes islamic banks give to their savings account holders as a prize from their profit share. please its very important to understand this. example: Abu Dhabi islamic bank.
Is there a way I can discuss this with you ?
Can you make a session on Tesla Loans, it will go viral !!!
How about when you default and they charge you extra charges for that?
If you default on paying rent for anything you’ll be charged a penalty and then if that doesn’t motivate payment they will simply take the asset away from you. It’s the same if you leased an apartment a machine or anything else.
Practical Islamic Finance thanks for your reply, so is the contract permissible if it includes late penalties/interest in the case of a default?
Late fees are different from interest ... watch my video on the topic
Practical Islamic Finance can I get an email address for you please as I have a few questions I would like to ask from your expertise in this subject?
Go to my blog (in description) you’ll find my email in the contact information section
thanks for your sharing
Faisal my pleasure
After the lease is up , is it halal to buy the car using cash?
yeah why not. so long as you aren't forced to buy it, all good.
if this is not haram, then why is there is a separate islamic lease- ijarah montana bin tam leek? how is that different from the normal lease we find in conventional market?
ijarah montahiya bitamleek is a different product and refers to "rent-to-own" arrangements. I analyze that product on my blog practicalislamicfinance dot com if you're interested.
The condition u r telling is ok...but problem would be only if they insured their risk.
Excellent explanation mashAllah. Clear and easy to follow. I will cross check with a sheikh who is scholar in Finance. Can you include your credentials in your introduction at the beginning ?
Sir, it's the same thing tho . Car or lending money because they are both profiting off of you the one who give you money makes more profit and and the one who gives you the car or a house makes more profit extra profit then the actual price interest is interest plain and simple
YES SIR! Finally someone gets it!
So buying from the supermarket is interest with this logic since they buy cheaper from the manufacturer or farm etc… they are making a profit by re-selling to you. It amazes me the dumbfounded no logic takers on here.
@@gogoakh5946 misleading comment
Doesnt this video contradict your general point of view about riba?
how?
First of all Jazak allah khair. I hope you do not mind me asking if you have any religious degree to support your points of view ?
I am not sure if you have car hire scheme called PCPin USA ( available in the UK). If so is it permissable ? Last question to sum up your video would you say as a general rule is car leasing is permissable although the concept in the western world nearly always has few interest/fees/deposits whether hidden or clear in the contract, also there is always a fee/interest/penalties for any late payment ?
Again Jazak allah khair for your efforts in an era where the scholars are quite far off from the real financial details and awareness of muslims circumstances in the non muslim world.
Salam brother Eyas, from my very quick study of PCP in the UK it seems like its the equivalent of the rent-to-own contract with the option to purchase at the end of the lease. If my understanding is correct, then I see nothing wrong with it so long as purchasing the vehicle at the end of the period (the balloon payment) is optional and not mandatory. The moment it becomes mandatory, it is riba.
Yes, as I mention in the video, car leasing is in generally permissible. I don't think charging late fees is prohibited: th-cam.com/video/ok5Xjab5jpo/w-d-xo.html
As for my qualifications : th-cam.com/video/UyDGKEkrS6c/w-d-xo.html
@@practicalislamicfinance Thank you so much for this. Is there any other scholar that would also substantiate your view brother? I feel really guilty and hate my car as I just found out that it might be haram
Can you please make a video about PCP and Hire Purchase car finance!!! Jazakallah khair
ASC brother
I am wondering if you can start a halal company where we muslims can put our money together and buy houses. I heard from sh Bilal Philips saying they started doing it in Canada. Thank You
Fardowsa Khalif I have started a company with the intention of doing this. Currently we finance smaller needs but will graduate to home financing when we have enough financing inshAllah.
Practical Islamic Finance
Thank You brother may Allah reward you for your effort and good deeds
I am planning on renting until something that is true Islamic comes out InshaAllah. Please let me know if and when you start any halal way to buy a house. InshaAllah.
Will do inshAllah. Please share your contact info and I will put you on our mailing list.
you can see my email by going to my channel page -> about ->business inquiries
You already have such an initiative in Canada. Please check: www.ansarhousing.com/ . They actually apply one of the purest forms of Islamic Finance, Musharakah. It might be appealing to you.
0:50 LIE :" the prophet never prohibited them"
Hmm how about that :
Narrated/Authority of Jabir
The people used to rent their land for cultivation for one-third, one-fourth or half its yield. The Prophet (SAW) said, "Whoever has land should cultivate it himself or give it to his (Muslim) brother gratis for cultivation; otherwise keep it uncultivated."
1.Calm down.
2.If you understood the Hadith as a prohibition on renting land you’re mistaken. Understand the Hadith before you cite it.
@@practicalislamicfinance Even if you think rent is not riba you should tell the truth about those dozen of hadith of the prophet saying you cant rent anymore your land
now you are saying to me I need to " Understand the Hadith before you cite it." but why you didnt give the explanation at first? Because you simply lied and pretends those hadith didnt exist!
While they actually existed and create one of the biggest divergence in islam history even the son of Omar stopped renting because of those hadith
I think you made a big sin
“Telling lies about me is not like telling lies about anyone else. Whoever tells lies about me deliberately, let him take his place in Hell.” Narrated by al-Bukhaari,
you knew about those hadith but you delibaretely said "the prophet never forbids renting lands"
If I was you I would remove this video and make it again with the correction and your explanation but we all know you dont care about lying on the prophet.
Elmundo first off, you’ve been rather rude to me and if you don’t start talking in a more civilized manner I’ll stop interacting with you. Second, reread the Hadith. The prophet does not forbid renting land. He forbids renting land in exchange for a share in the harvest. If you’re looking for who is lying about what the prophet said I suggest you try the mirror.
@@practicalislamicfinance hmm you said in your own video he NEVER forbid renting land now it s different it s more "complicated "right? so YES he did forbid a certain form of renting land
why you didnt said that at the first place in your video ?
Elmundo because to say he forbade renting land is inaccurate. He forbade having the rent be a share of the harvest.
Any website defines money factor as the finance charge AKA interest. People need to stop making all these fancy finance loopholes to hamek the haram halal. I talked with many car dealerships about leases and they charge interest. therefore: haram - plain and simple.
So then which type of Contract should we ask the dealer for ?? Thank you
@@OfficialGoldenboy hey Salams and thank you for the question! Unfortunately, as of now, the only halal way to buy a car is buy it with cash - now I understand most don’t have cash to buy cars on the spot, therefore, I advise you to save up and buy a car that is affordable until Allah bestows upon you more of his wealth! InshAllah by sticking to strictly to what Allah has made halal, he will create ways for you to live a happy and halal life !
@@purstatus I live in the USA & I don't have much money saved up The Whole country runs on credit & loans I'm just trying to figure out which type of contract is best to ask for .. Thank you for responding from a Christian brother