Auto Financing Under Islamic Banking

Current scenario: The auto industry, especially in the United States, is on a downward spiral, and no one has any idea what’s in store for this industry. The same trend is noticeable in other parts of the world, including Japan. With the biggest names in the automotive world like General Motors, yes GM, and Toyota bleeding non-stop, anyone can guess how long these venerable auto industry can hold out against the market elements.

Bargain time: However, for consumers, especially those looking for a great deal, there are plenty of deals to be had just by asking! This may be the best time to hit the iron, that is, buy a car! And there are plenty of financing options available to get your dream car into the garage!

The Islamic option: In this article, we will take a look at the Islamic financing option for buying a car. Financing for car purchase under Islamic Banking is done under ‘Murabaha’ contract. Simply put, it is a cost-plus markup contract.

Usually, the Islamic Bank or financial institution would have certain criteria to assess your creditworthiness and eligibility for a car loan, taking into account your salary or business income, i.e. your occupation and other sources; your monthly expenses, regulatory payments, etc. and lastly, your net income.

Now suppose that after going through the above process, the bank gives you the good news: that you are eligible for a car loan of USD 25,000.00 that you had applied for to buy the machine of your dreams. The next step would be to calculate the Bank’s profit margin on the loan amount. Suppose this results in USD 5,000.00. That means the total cost of this deal to you is $30,000.00. Of course, the bank would have taken your markup into account when calculating the amount of your car loan eligibility. The other variation in the previous case would be that the cost of the car is USD 20,000.00 and the profit margin is USD 5,000.00 or less as the case may be.

Apart from the above, other details to work out include:

• Initial payment: Some banks would require you to make a down payment on the car, which would increase your stake in your dream car, as well as reduce the number or number of payments you have to pay.
• Refund: The amount of the loan, plus the profit margin, as a whole, would be divided into the same number of agreed installments, say, 60 or 72 as the case may be, and you would be obliged to repay it within the stipulated time. . Some banks offer a moratorium in the repayment, that is, they allow you to start paying after, say, two or three months after disbursing the loan. Some other banks also offer to rework installments after a portion of the loan is paid off. Let’s say you have paid 12 installments. The Bank then draws up a new nde on the balance of the loan amount remaining after the payment of the 12 installments. Upon full loan payment, his car truly becomes his!
• Accessories: In the increasingly competitive environment in which the banking industry operates, it is not unusual to get a few add-ons with your auto loan: zero balance account, free auto insurance/dealer, free auto loan counseling services , as well as other services offered by the Bank, etc. Take advantage of the gifts!
• Delivery!: Assuming you’ve already identified your baby, that’s your dream car, and the place you want to buy it, now it’s the Bank’s turn to buy the car from the dealer on your behalf and have it delivered to you. !

Go ahead and enjoy your drive! Of course, there are no free lunches. Please do your due diligence before deciding to take out a loan. And don’t forget that seat belt! HAPPY DRIVING!