Car Ijarah or Car Loan?

By BankBazaar.ae | January 12, 2016

car loan in uaeWhen you think of a car loan you think about all the running around from one bank to another, the approval process, the paperwork and the amount that the bank will be willing to lend. Now imagine a situation where the bank buys the car and then allow you to ‘rent’ the car for them. You don’t have pay down payments or an interest on the car. This is what is known as Car Ijarah or Ijarah thumma al bai’. It does sound like an attractive deal but which one should you choose? Car Ijarah or a Car Loan?

Car Loan in a Nutshell

Almost everyone knows exactly how the car loan works. You choose your car, approach a bank and ask for them to finance your car. The salient features of a car loan in the UAE are:

  • Most banks in the UAE will provide finances for both used and new cars.
  • The finance amount will be a maximum of 80% of the cars value. The remaining 20% has to be paid by you as the down payment.
  • The loan amount is paid back with interest over a fixed period of time in equated monthly instalments.
  • The loan amounts differ from one bank to another but can go up to AED 1.5 million.

Car Ijarah in a Nutshell

Car Ijarah can be considered a hire purchase scenario because under this offer, the bank purchases that vehicle on your behalf. The car is then rented out to you for a monthly payment for a fixed period of time and you can take complete possession of the car at the end of that term. The key features of car Ijarah are:

  • It is based on the Sharia laws of Islamic Banking.
  • Being a part of Islamic Banking, there is no interest charged.
  • In case you fail to make a payment on time, instead of making you pay a penalty to the bank, the penalty amount paid by you is donated to charity.
  • This too can be used to finance both new and used cars, however, when it comes to used cars, there are rules regarding how old the car can be.

Differences between Car Loan and Car Ijarah

So should you just walk into a bank and drive out with a new car or walk out with 80% of the money for your car? Before you make that decision, you should understand the differences between these two options.

  • With a car loan you have to pay a down payment of 20% of the cars price whereas with car Ijarah you don’t. This doesn’t mean you pay nothing to get the car; you still have to pay a security deposit of 10% to 20% depending on the bank you approach.
  • Car loans can fund up to 80% of the car whereas car Ijarah can provide 100% of the funds for the car.
  • Penalty for late payments with a car loan will be that you pay a late payment fee to the bank however with car Ijarah, since Islamic banking does not allow such a practice, any late fee you pay will be donated to charity.
  • More often than not, car loan offer only the money you need to buy the car but most of the banks that offer car Ijarah you get comprehensive Takaful insurance as part of the package.
  • When a car is purchased through a car loan, it is owned by you from day 1 but with Ijarah, the car is actually owned by the bank which ‘rents’ it to you for a fixed amount every month. This means that once you have paid for the car you need to get it transferred to your name.
  • One disadvantage of Car Ijarah may be that, in some cases, only UAE Nationals will be allowed to avail this facility however, with a car loan, even expatriates are allowed to apply for one.
  • As far as salary requirements are concerned, both the schemes are pretty similar in that they both need you to earn a minimum amount every month to be eligible for the loan.
  • Since car Ijarah means that you hire the car from the bank, the loan is not considered a loan in its traditional sense which means that it does not show up as debt in your financial records. This means that when you approach a bank for a loan, you might not have to worry about your car Ijarah payments to affect your eligibility for said bank loan.

So which one should you go for? To give a definitive answer to the question is more difficult than you may realise but it is safe to say that the option to take a car loan or car Ijarah is dictated by your own financial situation and the eligibility criteria for said loan. If you are eligible for car Ijarah then, by all means, take that since you get the advantage of 100% finance and 0% interest.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

One thought on “Car Ijarah or Car Loan?

  1. Fast One Rent A Car

    I have no idea about Ijarah, but i know majority of the loan are interest (Riba), First i’ll learn more about Ijarah than i’ll choose weather ijarah is right or not.

    Reply

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