Question: What is the Islamic law about buying a car on installments? Many auto companies and authorized car selling agencies sell new and used cars on installments. Thus, when customers go to buy those cars, the companies refer them to certain institutions such as banks and insurance companies. The companies get back the capital as well as the interest in monthly installments stretched over a number of months or years. If someone fails to pay his installments on time, the company overcharges the defaulter. The interest rate is determined on the basis of certain important factors such as the client's turnover, amount of income or timely-repayment of installments. The amount of interest generally paid is 4%, 3% or 5% or more or less. What is the Islam law with regard to buying a car on monthly installments keeping in view the foregoing details?
Answer: If the loan providing companies first buy the cars from the agencies and then sell them to customers on installments with some increase (interest) as part of the prices of the cars, the transaction is in order. Indeed, if a penalty is imposed due to a customer failing to make payment on time, it is forbidden (harām).
And if it means that the companies or agencies themselves sell the cars to customers, and in return the loan providing company gives the price of the cars to their manufacturers or agencies, and receives more money on installments from the customer, it is forbidden.
Ayatollah Al-Sayyid Ali Al-Husseini Al-Sistani