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.
Salam Dear Brother,
I have question on buying cars and I live in United Kingdom. My question is is it haram to buy a car the following way. I always buy cars based on hire purchase this mean at the end of the contract and after all payment done I keep the car. Now to the important part of financing the car. The cash price is normally £21000, as i don't have all of this l put deposit of £5000 And the remaining amount of £16000 will be borrowed by the dealer from their approved lending partners normally they say to me that your total paying price would be £24000, this means i will borrow not £16000 but £19000. The document I receive from lending company says that I owe them £19000 they divid this amount into 36 monthly fixed payment and says 0% APR. Now I m not comfortable with this as I think this is riba through back door. I asked them what is the reason they borrow £19000 rather than £16000, they say this is their profit.
I need your opinion as to whether this is Harram or halal. If harram what is the solution.
Thank you in advance.
Walaykum Salam brother Gulam,
Your instincts are correct. This is riba. I would encourage you to watch/read the following for more explanation on why this is: /2017/07/12/selling-for-more-than-cash-price-is-it-riba/
Do you trade cars or are you simply buying cars for personal use?
Assalamu Alaikum. JazakAllah for the video. In the U.S, the finance company is actually leasing a vehicle to the consumer. I don't know how the process works but the dealership sells the vehicle to the finance company but that financing company is actually never taken ownership of the vehicle.
Thanks Muhammad.
Assalam,
Thank you for the clear explanation. However, I still have a question which is if you say that conventional lease is allowed, why is there a different lease in islam called ijarah muntahia bin tam leek? What makes this type of lease more islamic, and why does it say in the definition that it avoids interest? I would really appreciate your answer on this.
Thank you
Walaykum Salam, Ijarah Muntahiyah Bitamleek refers to "lease-to-own" arrangements and in some cases it isn’t Islamic at all. Read my article on Ijarah muntahiya bitamleek
I think you are confusing the money factor lease finance which has an interest component. When you lease a car , the owner is not the car dealership but the bank which adds interest to the lease therefore not allowed and hence Islamic lease came about as here the bank buys the entire car first and then sells it at a profit. So leasing is not halal but if car dealership finance the car( not lease) at 0% Apr that is permissible as you are buying the car eventually with no interest
nope. As I mentioned the customer is not paying to be loaned any money but to gain the right to use a car, regardless of who owns the car. Accordingly, their payments are rent and not riba. read my article on Murabaha.
For example if the car burns down in accident. Your lease finance company expects you and your insure to pay their assessed value of the car and it isn’t uncommon for their to be GAP and you actually owe the lease finance company money. To cover this difference people at GAP insurance.
Now to your renting example. If you burn down the house on accident. The property owner is not coming after you for any money, his/her own insurance covers that you personally have to contract with the property finance company. But when you lease a car you actually have a contract with the lease finance company.
Assalamu Alaikom,
I think one issue that complicates the matter is that the dealer usually asks you how much you're willing to put as a down payment at the start of the lease. For example, if you put down $1,500 on a 36 month lease, you will notice that the total amount paid over the course of the lease will be less by greater than $1,500. To put it in another way, if you decide to put $0 down, that $1,500 will be spread over 36 months plus a money factor/interest amount.
So what they are basically doing is lending you that $1,500 and taking Riba on it. To take it to an extreme, if you decide to pay the entire amount of the lease up front, you will end up paying less than the accumulated payments over 36 months.
Isn't this the definition of Riba?
Assalamu Alaikum Ziad, what you mentioned is not Riba due to 2 main factors. First of which is that at no step during the entire leasing process are you actually borrowing money from anyone. You are paying the weekly, bi-weekly, monthly [whatever] payments out of your pocket.
The second point relates to the payment rate changing depending on the amount of down payment is that the owner of the asset has the right (halal) to dictate whatever price he deems fit. I can sell a pen to friend A for $1, or friend B for $50, or friend C for $100 in installments; I own the pen and I choose how much I want to sell or lease it.
Thus, from my understanding (which is rather limited - plz take don't take at face value) the situation you mentioned is not Riba; and Allah knows best.
I mean no offense by this but you said your knowledge of this is limited, but your article suggest the finance charge in leasing is completely okay halal. Wouldn’t it be safer that you ask or post a fatwa from an Islamic scholar that has a background in banking/finance. Seems quite risky to post this article if it is incorrect/haram, you may have misguided people on accident.
That’s not an argument. Anyone could be wrong with any opinion.
Assalamu Alaikom all,
Incidentally, I looked into this issue again a few days ago. I verified by going to car lease forums and reading articles about it.
There are three main charges you pay when you lease a car: (1) the depreciation cost, (2) the "interest" (sometimes called car rental charge), which is the profit amount they want to make on leasing you the car, and (3) the interest (riba) on the amount of money you borrow. So there is interest involved in leasing.
Let's take an example. Suppose you want to lease a $50,000 vehicle for 3 years. The expected depreciation is calculated ahead of time, let's say after 3 years the car is expected to cost $35000, meaning the first cost you're going to incur is $15,000. The second cost is how much profit they want to make. Say over 3 years, they want to charge you $5,000 for leasing the car, that's their profit rate. Effectively, this means you owe them $20,000 over 3 years, meaning 20,000/36 = about $555.55 per month. However, unless you pay this $20,000 up front at the start of the lease, they're going to consider that you're borrowing $20,000 to pay it over 3 years, and they're going to charge interest over it. So you will not pay $555.55, you're going to end up paying more (say $580). This last charge is 100% riba, as they're upping the price in exchange for time.
I fully disagree with what you wrote where you mentioned: The second point relates to the payment rate changing depending on the amount of down payment is that the owner of the asset has the right (halal) to dictate whatever price he deems fit.
This is what some so called Islamic banks use to trick people when they charge them Riba (they call it "profit). You cannot increase price in exchange for a delay in payment. This is practically the definition of Riba. There are Hadiths about it, and both Ibn Abbas and Ibn Mas'oud explicitly mention it - you cannot up the price in exchange for delaying the payment, or for paying in installments. The fact that you can sell for friend A for a certain price and for friend B for another price is beside the issue, because what ends up happening is these so called Islamic banks are taking the time of payment into account, for the same item.
To elaborate on my previous post, the very fact that they check your credit score at the time of signing the lease should be enough to raise suspicious that there is going to be lending of money involved (almost surely with interest). That being said, I read that you should be able to negotiate the lease such that you only pay the depreciation cost the car rental cost in a single payment. Following my example, you pay the $20,000 ($15,000 $5,000) up front get the car for the lease contract. Note that this is different from paying the entire lease amount up front ($580 x 36), which they might trick you to do.
In reality, the "car rental charge is calculated" by looking at the car's value after depreciation at the end of the lease term, and then adding a percentage on top of it, this related to the money factor charge.
Salaam brother,
So is PCP with an apr rate attached to it shariah compliant? I have no intention to make the balloon payment at the end of the contract to own the car. I was under the impression that PCP is halaal, because you are paying the owner (lender) a monthly rent, a right to use the car until that term ends. I am close to completing a PCP deal for a car, I dont have the means to buy cash and am in need of a car right now. What should I do? Jazakallah in advance