Buying a car in South Africa is a memorable milestone; one that not many can afford.
Apart from purchasing a house, a vehicle is one of the most expensive items you will come to own. And fortunately, lenders are making it easier for Muslim customers, offering Islamic finance.
If you’ve spent some time Googling “what is Islamic finance?” and you’re still unsure, we’ve got you covered in this article. Essentially, it is interest-free car finance that allows you to purchase a vehicle without breaking religious laws. Read our article below to find out how to apply for halal finance.
What does Islamic finance mean?
Before we get into everything else, it is important to understand your vehicle finance options, and what the financial system entails. Islamic finance does not mean that Muslim clients will be paying less than any other individual when purchasing a car. It simply means that this finance plan offers vehicle finance without interest because of religious reasons, but lenders will add a profit rate to the cost of the vehicle.
Islamic finance works under the principle of Mudarabah and avoids interest-based transactions (RIBA). With a profit rate instead of it being interest earned for the lender, it is a concept of purchasing an item on the borrower’s behalf and then selling it back to the borrower at a profit.
Individuals will be able to lease the vehicle for five years. When calculating the costs to rent out the vehicle, the profit rate will be added to the price. By doing this, the customer can pay the money off and increase their ownership rights to the vehicle whilst reducing the lender’s equity.
If you’re wondering how that is different from getting a conventional car loan? Well, payments made toward the vehicle are considered rent on tangible property, rather than the interest you’re paying back because you used borrowed money. Because it is considered rent on tangible property, it is permitted under Islamic law.
What about car insurance?
Car insurance is forbidden under Islamic law as it is seen to have similar qualities as paying interest or gambling. With that being said, one may think car insurance is a problem as many lenders make having insurance a must for any vehicle finance. But, with Islamic finance, lenders allow Muslim customers to get vehicle financing without insurance. Instead, that insurance would be paid according to the driver’s profile.
Where can you get a vehicle?
If you were wondering where you can get a car or if you need to only go to car dealerships that have been approved by a lender. Many lenders in South Africa allow you to get your vehicle from a car dealership, private seller as well as an auction. All these are great ways for you to get a vehicle.
If you’re unsure of where to purchase your vehicle, read the following.
- Car dealerships are the go-to for any car buyer. The key benefit of purchasing from a dealer is safety. Choosing a car dealership is a safer option as you’re ensured to receive professionalism and a streamlined sale. Dealerships are service-oriented, so as a customer, you will experience quality treatment, and sales agents will ensure you get everything you need. A few issues that may arise when going to a dealership are that the cost can be higher than one of a private sale, and sales agents can be pushy when it comes to closing a sale.
- A private seller, on the other hand, can offer you an affordable deal as sellers are more willing to negotiate a better deal. When done correctly, it is safe, and you can get more information on the vehicle. You can also read a buyers body language and the condition the vehicle is to, gauge if this is the right sale. But, as mentioned, that it does have mishaps when it comes to safety as there are scammers online who advertise a good deal. Unlike a dealership, you need to gain enough knowledge and background on the vehicle to ensure it isn’t a lemon car, nor has it been stolen.
- Auctions have a bad reputation as they are typically repossessed vehicles, sold as-is. This is true; however, there are many vehicles sold at an auction which are in good condition. More importantly, you can save more money at an auction and still manage to get a vehicle you love.
How long does an application take?
If you’re wondering how long does vehicle finance approval take, it depends on the lender you choose. You will, of course, need to get pre-selected and a background check will need to be done before you can get pre-selected for financing. When applying for halaal vehicle financing, it is a good idea that you use the car finance calculator provided by lenders. This will give you an idea of how much you will be paying per month; the profit rate. This will help you draw up a budget that is suitable and can accompany this monthly instalment. When applying for vehicle finance, make sure you check your credit score and see if you will be able to qualify for finance. Lenders still require you to have a good score to ensure that you are a reliable payer who will stick to your payment arrangement.
Save up for a deposit
As any other first-time car buyers guide, we must mention the importance of saving up for a deposit. Vehicles are expensive and can take up to 72 months to finish a term loan. Saving up a deposit is an efficient way to curb the cost and save more in the long run. Islamic vehicle finance allows you to pay an upfront amount on the vehicle of your choice. Having a deposit isn’t only helpful for pay interest; it can also help lower your monthly instalments. This will ensure you borrow less, and it shows a positive reflection of you to the lender, which might improve your chances of getting pre-selected.
Financing a vehicle is a big deal as it is a large amount of money that you will need to pay every month. This is why it is vital that you are financially ready for this expensive, and you have thought about the additional costs that come with a car. Those costs include insurance, petrol as well as maintenance of the vehicle. But apart from that, financial service providers have made it possible for Muslim customers to purchase the car of their dreams without breaking any religious laws.