Financing A Car Under Islamic Banking

Financing A Car Under Islamic Banking

Current Scenario:

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

Now, suppose after going through the above process, the Bank gives you the good news that you are indeed eligible for a car loan of USD 25,000.00 that you had asked for, to buy your dream machine. Of course, the Bank would have factored its profit mark up while calculating your eligibility amount for the car loan. The other variation in the above case would be that the cost of the car is USD 20,000.00 and the profit mark up USD 5,000.00 or less as the case may be.

The Islamic Option:

In this article, we shall take a look at the Islamic financing option for buying a car. Financing for purchase of cars under Islamic Banking is done under the contract of ‘Murabaha’. Simply speaking, this is a cost plus profit mark up contract.

Time for Bargains: For the consumers though, especially those on the lookout for a good deal, many bargains are to be had for the asking! This may be the best time to strike the iron i.e. buy a Car! And there is any number of financing options available to bring that dream car of yours into the garage!

Generally, the Islamic Bank or financial institution would have certain criteria to evaluate your credit reliability and eligibility for a car loan, having regard to your income either from salary, or business i.e. your occupation, and other sources; your monthly expenditures, statutory payments etc. and finally your net income.

Other than the above, other details to be worked out include:

Add-Ons: In the extremely competitive environment that the Banking industry is operating, it is not unusual to get a few add-ons with your car loan – zero balance account, free/concessional insurance for the car, free advisory services in respect of the car loan, as well as other services on offer by the Bank, etc. Do avail of the freebies!

The Islamic Option: In this article, we shall take a look at the Islamic financing option for purchasing a car. Financing for purchase of cars under Islamic Banking is done under the contract of ‘Murabaha’. Now, suppose after going through the above process, the Bank gives you the good news that you are indeed eligible for a car loan of USD 25,000.00 that you had asked for, to buy your dream machine. Of course, the Bank would have factored its profit mark up while calculating your eligibility amount for the car loan. Upon full repayment of the loan, your car becomes really yours!

Some Banks offer a moratorium on repayment, that is, they allow you to start repayments after, say, two or three months after disbursing the loan. The Bank then works out a new EMI on the balance of the loan amount remaining after payment of the 12 installments. Upon full repayment of the loan, your car becomes really yours!

The Delivery!: Assuming that you have already identified your baby, that is your dream car, and the place that you wish to buy at, it is now the turn of the Bank to buy the car from the dealer on your behalf, and have it delivered to you!

Down Payment: Some Banks would require you to make a down payment for the car-that would increase your stake in your dream car, as well as bring down the amount/number of installments payable by you.

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