This article explains the hidden cost (financing cost) that is sometimes built into the price of items in the market. You can recognize this hidden cost by asking whether you will receive a discount if you pay the full price up front. If they say yes, that means you are paying a financing cost. To be smart, and reduce the total amount of time we spend working in our life, we have to spend our money carefully and not waste money on financing. However, in life, there are times when it is hard to avoid this situation. In general I do not recommend ever buying a new car, unless you have a fully paid off house, saved for your children’s full education cost, and so on. Otherwise bite the bullet and do some hard work to get a used car instead. If its 1-2 years old its just as good in my opinion. Keep in mind new is luxury.

My original article did not state that this was haram, but I called it “interest”. However the misunderstanding for many is that riba = interest, aka RIBA IS INTEREST. HOWEVER, that is not true. INTEREST is one form of RIBA, however there are many forms of riba.

So whatever you think its hidden interest or not, this “financing charge” (charging more for deferred payment) is considered halal as long as it meets some conditions (no late fees among others)

In this fatwa on paying on installments It is permissible to charge more for installments than for a cash price. (See all conditions in the fatwa).

What follows is the original article written in August 2008 modified for clarity

A lot of car companies (auto dealers) are offering 0% interest on new cars. However, beware, this is not really 0% in a lot of the cases. Some Muslims are being tricked into this “0%” which is not really “interest” free. What I mean is that there is a financing cost.

Here is how you can find out whether this is a real 0% or not.

Tell the dealer you want to buy a car for cash. Say a Toyota Camry at $35,000.
Then the dealer will say the total price including tax, delivery, and so on, is $37,221 (for example).

Then tell the dealer you want to pay it over 2 years, at 0% interest.
Suddenly you will see the price jumps up by a couple thousand dollars to $39441 or something. How did this happen?

Oh because you don’t get the “cash discount” which is like $3000. So if they offer a “cash discount”, that means you are paying to finance it.

However, you can convince the dealers to give you 0% financing, you just have to talk to them and see what cars they have, maybe its left over from last years stock and not sold yet, so they will be willing to give it to you. I have found that in a lot of cases they will negotiate, but more likely they will do so if you have bought from them before and they know you.

Remember, interest is evil.

However, it is permissible to agree to pay more for a car in order to pay on installments. Read the updates below. Keep in mind that you have to be very careful what is in the contract.

Signing a contract with interest is cursed with Allah. Also realize that just because it doesn’t use the word “interest” does not mean its halal. Paying fees for late payment is also a form of RIBA

It is permissible to agree to pay more for the item as long as the debt doesnt grow. There are some other conditions that must be met too, see below:

According to Dr. Monzer in this Islamonline live fatwa session (Question by Adham from Canada on Ask a Scholar) he says

On the other hand, buying at a higher price with zero interest is permissible because the increment is part of a price it is not an increase in a debt. Any object usually has a higher-than-cash price when payment is deferred, this is ok.

In this other fatwa Dr. Monzer says

“Accordingly, while it is permissible to make a credit sale contract at a higher price than the price one would have accepted for a cash sale. You may not make the sale at a cash price and then add the would be price differential to the amount of debt that resulted from the sale, because this is an increment in a debt, not the price of an item.

By the same token, a sale contract must be definite. It cannot be such that the price is either $100 if you the purchaser pay within 3 days and $110 if he pays in 60 days. This is called “two sales in one” that is clearly prohibited by the Prophet (peace and blessing be upon him).”

Also, see a more cautious response from Monzer Kahf on Leasing…

From IslamToday an interesting scenario relating to other products. they say

Selling things on installment is permissible as long as the seller owns the merchandise that he intends to sell in that way. The seller and buyer may reach an agreement among themselves on the price and the method of settlement. Usually, the amount of selling by installments is higher than that of an immediate cash payment.

As long as it is the actual owner or purchaser of the goods who will sell them to his customers on credit installments, then it is lawful.

and

Additional charges may not be imposed upon failure to pay in a timely manner.

(also same thing stated here)

Add to be fair, Islamweb.net states it is not allowed to decrease price if payment is early as this resembles riba.. However IslamQA in “PAYING IN INSTALLMENTS” states this is okay as long as it wasn’t agreed upon ahead of time (and with a few other conditions) and in this other fatwa “waiving part of the debt” it explains why there is difference of opinion on this topic.

but keep in mind..

They replied:

It is haraam for the Muslim to borrow gold, silver or money from someone on the basis that he will pay back more than he borrowed, whether the lender is a bank or anyone else, because that is riba, which is one of the worst of major sins. Any bank that deals in such transactions is a riba-based bank.

Fataawa Islamiyyah, 2/412

As they say, the devil is in the details. Keep Allah in mind and consult a knowledgeable scholar.