Q&A: Purchasing a New Vehicle

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Question:
 
I wish to purchase a vehicle but do not have the cash. If I obtain finance from the bank, I will be involved in the sin of interest. A friend has informed me that if I do a “fixed rate deal” with the bank, it will be permissible since this will not tantamount to interest. Is this correct?
Answer:
 
Financing a vehicle through a conventional finance agreement with the bank will involve one in interest even if it is a “fixed rate deal.” This reality will be clearly ascertained if one carefully considers the various steps of the transaction. Generally, the sequence of events will be as follows:
1. You will purchase the vehicle from the dealer for R50 000, 00.
2. The dealer will invoice the bank that has agreed to provide the finance for R50 000,00.
3. The bank will pay the money to the dealer.
4. The bank will debit you for R75 000,00 based on a “fixed rate deal.”
5. You will be given your fixed monthly instalment.

At this point the question that one needs to ask is: What are you paying the bank the extra sum of R25000,00 for? At no point did the bank sell you anything. Thus in reality the bank has paid R50000,00 on your behalf to the dealer and is “charging” you R75 000,00. Despite the “fixed rate deal” you are paying R25 000,00 interest to the bank since it has sold you nothing. It is therefore evident that a “fixed rate deal” does not necessarily make the transaction free of interest.

CORRECT PROCEDURE
 
In order for the transaction to be valid in terms of Shariah, the bank must first purchase the vehicle from the dealer for R50 000,00. The bank must then take possession of the vehicle and assume full risk for it. A separate transaction must then take place between the bank as the ‘seller’ and you as the ‘purchaser’. The bank may now sell the vehicle to you for R75 000.00 payable over a fixed period. In total you will only pay R75 000.00. It is also important to note that upon the sale of the vehicle by the bank to you, ownership of the vehicle must pass on to you. These are the broad principles. Should the transaction include any such conditions which are not permissible in terms of Shariah, the permissibility of the transaction would be affected.
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