6th March 2017
السلام عليكم و رحمة الله و بركاته
Question: What is the status of a PCP car finance plan in Islāmically? Can we purchase a car using such financial avenues?
الجواب حامداً و مصلياً
In the name of Allāh, the Most Gracious, the Most Merciful
The Personal Contract Purchase (PCP) agreement in principle is similar to Hire purchase plan (HP), a financial scheme of purchasing a car by paying off the depreciated value in monthly instalments after the initial deposit. The deposit can vary between 10%-20% of the total price of the car, depending on which dealer the contract is signed with. This deposit is paid either by cash in person or from the extra value from the previous car finance. So for instance, if the value of the previous car at the end of the deal is more than the monthly payment then the additional money can be used as a deposit for the next car.
After the initial deposit, the dealer predicts the value of the car by taking into consideration mainly the overall mileage the customer will cover towards the end of the contract and also the agreed term. The dealer then fixes an amount accordingly, payable to the finance company by the purchaser. This is known as the Balloon payment or Guaranteed Minimum Future Value [GMFV] – prediction of the minimum future value of the car towards the end of the agreement based on the overall mileage covered throughout the duration of the contract. The higher the mileage, the lower the value. For instance, a car with 5000 mileage on the clock values more than the one with 10,000 mileage on the clock. The payment term averages between 2-4 years.
Once the value is predicted, a large sum is set aside towards the end of the term whilst the remainder is split over the specific term in monthly instalments. The logical intent behind this is to allow the customer to make a monthly payment at an affordable rate. To illustrate this with an example, let’s say the original price of a car is £12,000. The customer pays an initial deposit of £2000 and the company calculates the predicted minimum value to be £8000 by the end of a three years contract. This amount is divided over 36 months (with added interest). A large amount namely £2000 is set aside towards the end of the term. Towards the end of the contract, the customer has one of three options namely, walk away and hand back the keys, hence no need to pay the remainder, to buy out the car by paying the remainder £2000 or part-exchanging it with another car if the car was returned less than the predicted mileage. 
Based on the information obtained from various sources and speaking to financial dealers, in most cases there is an additional charge of APR interest with the monthly payment. The charge is variable from 4%-12% depending on each dealers’ charge. In other words, the customer is paying not only for the minimum value of the car but also the interest. It, therefore, constitutes similar to a loan with added interest which is not permitted in Islām and furthermore, a unilateral benefit for the dealers, through the additional charge of interest rendering the transaction as void.
Therefore, the PCP agreement is a form of la oan which the customer agrees to pay over a certain period. Interest is added to this monthly payment, rendering it impermissible from an Islamic perspective. The same ruling applies to any car finance that include interest charges during monthly instalments.
[Allãh Knows Best]
Written by (Mufti) Abdul Waheed
Answer Attested by Shaykh Mufti Saiful Islam
JKN Fatawa Department
 Fatāwa Hindiyyah p. 143 vol 3
الْبَابُ الْعَاشِرُ فِي الشُّرُوطِ الَّتِي تُفْسِدُ الْبَيْعَ وَاَلَّتِي لَا تُفْسِدُ
وَإِنْ كَانَ الشَّرْطُ شَرْطًا لَمْ يُعْرَفْ وُرُودُ الشَّرْعِ بِجَوَازِهِ فِي صُورَتِهِ وَهُوَ لَيْسَ بِمُتَعَارَفٍ إنْ كَانَ لِأَحَدِ الْمُتَعَاقِدَيْنِ فِيهِ مَنْفَعَةٌ أَوْ كَانَ لِلْمَعْقُودِ عَلَيْهِ مَنْفَعَةٌ وَالْمَعْقُودُ عَلَيْهِ مِنْ أَهْلِ أَنْ يَسْتَحِقَّ حَقًّا عَلَى الْغَيْرِ فَالْعَقْدُ فَاسِدٌ كَذَا فِي الذَّخِيرَةِ.