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Report On

CAR FINANCING AND IT’S

WORKING

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ARTICLE I. TABLE OF CONTENTS

SECTION 1.01 EXECUTIVE SUMMARY

INTRODUCTION TO FINANCE ...................................................................................................... 1

Individual/Personal Car Finance ............................................................................................................................................. 5

Eligibility and quantum ......................................................................................................................................................... 5

Rate of Interest and repayment .......................................................................................................................................... 5

Security and Insurance.......................................................................................................................................................... 6

MODES OF CAR FINANCING ......................................................................................................... 7

Personal Car Financing .............................................................................................................................................................. 7

Ijara/Islamic Car Financing ....................................................................................................................................................... 7

TYPES OF CAR LOANS ................................................................................................................... 7

Secured Loan ............................................................................................................................................................................... 7

Unsecured Loan .......................................................................................................................................................................... 7

Specialized Loan.......................................................................................................................................................................... 8

Alternative Car Finance/Loan (Bad credit loans)................................................................................................................. 8

IJARA CAR FINANCING/LOAN..................................................................................................... 8

Ijara Financing ............................................................................................................................................................................. 8

Understanding Ijara Financing............................................................................................................................................. 8

IJARA AND MURABAHA FINANCING ........................................................................................... 8

Difference Ijara and Murabaha Financing................................................................................................................................

Reasons for taking Ijara instead of Murabaha Financing ............................................................................................... 9

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PILLARS OF IJARA ....................................................................................................................... 10

Types Of Ijara............................................................................................................................................................................. 10

Simple Ijara (Operating Lease): ......................................................................................................................................... 10

Ijara Thumma-Al bay (Financial Lease) ............................................................................................................................ 10

CHOOSING THE BEST CAR LOAN FOR YOU .............................................................................. 11

TYPE OF LOAN SUITS BEST FOR PAKISTAN............................................................................. 11

TERMS FOR APPLYING FOR LOANS (BOTH) ............................................................................ 12

IMPACT OF APPLYING IJARA INSTEAD OF PERSONAL LOAN ON PAKISTANI ECONOMY... 12

CONCLUSION ............................................................................................................................... 13

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Executive Summary:

Car Finance is all about buying a car at low price and lending it on a specific interest rate to other

hand. That person has to pay every month a certain amount of money. There are some kinds of

documentation; both the parties have been through to get a car loan.

Car financing can also be called as car loan, the party is getting car loan must have a good

credibility of availing and paying back that loan in the time given by the intermediary between

both the parties.

Car Financing is widely used all over the world, it has opened the gates for the people who

cannot afford to have a car yet they are allowed to drive one for them before making proper

payment.

Before going in for Car loan / Car finance, you must have someone who can be every

experienced in car financing so that you can reduce the risk of being cheated.

Car financing, allowed in both Individual and business purpose.

The main reason of financing you car is it, that it spreads the total cost of a vehicle to a bigger

extent rather than accepting cash at once.

Most of the businesses apparently the banks emphasis the idea of Car financing in terms to

generate more money out of it.

Instead of waiting for people to deposit their money and banks wait for their money to be used as

further invest most of the economist suggest the idea of financing it at a rate through which the

feedback amount or the return amount will be profitable and can result in recovering the

principle amount and can make further investments in the banking area.

Generally, when in back, you pay a certain amount of loan monthly installment lie 7 or 8

percentage of the total cost you have to give extra on each installment you made.

Which generally makes a great surplus for the person who lends it to you and trusts you to pay

the certain amount of money on each installment and one more thing is more important that you

need to be eligible for it and it need a high amount of investigation and documentations involved

in it.

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Introduction to Car Financing:

Car Finance is all about buying a car at low price and lending it on a specific interest rate to other

hand. And that person has to pay every month a certain amount of money. There are some kinds

of documentation; both the parties have been through to get a car loan. Car financing can also be

called as car loan, the party is getting car loan must have a good credibility (you must have a job

though which you can give the certain money to the other party) of availing and paying back that

loan in the time given by the intermediary between both the parties. It could be a dealer or a

direct manufacturer of that vehicle. Car Financing is widely used all over the world, it has

opened the gates for the people who cannot afford to have a car yet they are allowed to drive one

for them before making proper payment. But before going in for Car loan / Car finance, you

must have someone who can be every experienced in car financing so that you can reduce the

risk of being cheated. Car financing, allowed in both Individual and business purpose.

The main reason of financing you car is it, that it spreads the total cost of a vehicle to a bigger

extent rather than accepting cash at once. Moreover, let’s take an example that a vehicle has a

cost of (RS. 500,000) and you get it from manufacturer at (RS.450,000) and you have to sell it at

(RS. 500,000) then you only getting profit of (RS. 50,000). So, most of the businesses apparently

the banks emphasis the idea of Car financing in terms to generate more money out of it. Instead

of waiting for people to deposit their money and banks wait for their money to be used as further

invest most of the economist suggest the idea of financing it at a rate through which the feedback

amount or the return amount will be profitable and can result in recovering the principle amount

and can make further investments in the banking area. Generally, when in back, you pay a

certain amount of loan monthly installment lie 7 or 8 percentage of the total cost you have to

give extra on each installment you made. Which generally makes a great surplus for the person

who lends it to you and trusts you to pay the certain amount of money on each installment and

one more thing is more important that you need to be eligible for it and it need a high amount of

investigation and documentations involved in it.

Individual/Personal Car Finance:

In Pakistan, there are many businesses are emerging and Car financing is one of them, in car

financing there are two ways of financing, Individual car financing (also known as personal car

financing), it refers to the Finance car on your own, like contacting an intermediary who can

search a person (who is in search to get car loan) to you and set a commission between two

parties (you and the person taking that car on loan) that sets a percentage of commission between

two of you, and you have to collect payment afterwards from that person. This obviously

includes a huge documentation with the credibility of the person who is getting it (Like, how

much is he earning? where he works? how much he can pay back? how long it will take to repay

the money? at what rate he will give money?) these all the things include in it. While, you can

also Finance your used car through it, by adopting same procedure as it told above.

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In individual car financing Basically, deals with an individual lending a Vehicle (Offering a

certain percentage of loan to be paid monthly to that person on the principle amount of that

vehicle) and the other person pays that amount but it’s not easy as it seems it needs an agent

which let you meet the person who is ready to agree to your terms and percentage you set. On

other hand that agent took a commission fee from both of the parties.

(Graph source: Business Recorder)

Eligibility and Quantum:

In eligibility and quantum banks and the person who is financing his or her vehicle will see the

income and deposit amount of the person who is going to get that vehicle on loan and

furthermore, only 21 to 60 years old person is allowed to take a loan for a car which is based on

his or her income or making sure that he or she will repay the loan with interest on time.

Rate of Interest and Repayment:

The rate varies Bank to Bank, generally in Pakistan, only 36 to 61 months of loan for a car is

allowed which a borrower have to pay within time with interest. And if you escape a repayment

or installment so the bank has authority to make you penalize for the act of escaping the

repayment.

Security and Insurance:

Security of vehicle and loan both are most important. There are types of car loans which is

described below, moreover, the insurance deals with the misshape with your vehicle like if you

got any accident or you vehicle gets stolen so they have insurance to make it claim for you

during the payment tenure.

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Personal Car Financing/Loan

Normal car financing is widely used all over the world, Unlikely, Ijara car financing, Normal car

financing has various types of car loan which distinguish itself from Ijara car financing and this

is also been very widely used all over the world as compared to any other car financing.

Types of Car Loans:

Secured Loan

Unsecured Loan

Specialized Loan

Alternative Car Finance/Loan

Secured Loan:

Some lenders offer secure loan, secure loans, and means that there will be a security in that loan.

For example you need to put that vehicle which has taken from that lender as a security to him, if

you will unable to pay your payments for the specific time then the lender has the authority to

take procession of your vehicle or item (Which also mentioned in your documentation, and also

possibly signature by you).

Furthermore, the interest rate or percentage of monthly payment will be fixed no matter what

happens the rate will be fixed and you have to pay the remain on the same rate for time period.

Yet, according to lenders this loan is far better or less risky then unsecured loans. There are;

Short term secured loans and long term Secured loans;

Short term secured loans:

In short terms secured loans, due to the short term or within a year repayments Lender usually

high up the rate of repayment like if normally a person is paying 8% then he have to pay 12% in

short term secured loan while other things remains same.

Modes of Car Financing

Personal Car Financing/Loan Ijara Car Financing/Loan

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Long term secured loans:

In secured loans, long term has a long time of repayment that rate is low as compare to short

term and fix but the difference is that you have to pay in a long time of repayments with a fixed

rate.

Unsecured Loan:

In unsecured loan, some lenders offer unsecure loans and means that there will be no security in

that loan. This does not want you to provide an item to provide security, you lender sets a rate

according to your financial situation (Like, if he sets a rate according to your current income and

if somehow there will be an increment in your income then the lender has the authority to make

the rate he sat raise up) so, the repayment or interest payment percentage rate can be varies from

low to high according to your financial situation. In this the principle amount is same while the

repayment money is sort of high. Some of them will let you hose you time (Which should not be

more than 5 years), But as compared to secured loan unsecured repayment rate is higher which

result in more costly than secured loan.

Specialized Car Loan:

This is the special type of car loan which is pretty much suitable for students. If you are a student

and you need a car then specialized car loan is the best choice for them. It allows you to postpone

your repayments for a limited time (for example, you’re studying and can’t pay the loan so you

can pay after completing your studies). It specially needs you to match to their criteria. But in

this the lender set a high repayment percentage and could double the rate than its principle

amount. It’s basically not a good car loan which costs you much but it’s suitable as your needs.

Bad Credit Loans:

Bad credit loans basically is suitable for the person who is unemployed and seeking work to do

but the lender sees them as a “Highly risky” customers. So, Bad credit loans enable a car loan

facility by providing this loan. But the problem is, the rate is very high as compared to any kind

of loan you are getting. But it can help you make eligible for taking loan from other financial

institutions.

Ijara Car Financing/Loan

Ijara Financing:

The word Ijara means Rent, Ijara financing means that your are giving something on rent. And it

is widely getting common in Pakistan. Or it’s also be defined as the transfer of ownership to

other person on agreed price and conditions or situations. But the thing is this, that Ijara

Financing is not allowed to do the thing that is prohibited (HARAAM) in Islam.

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Understanding Ijara Financing:

In Ijara finance, there is a lot more difference than normal car financing. In Ijara car financing

you replace interest based repayments to rent payment and there will be some mutual agreements

between the lender and the borrower about the agreement they are making. According to the

people, they find it more easy and flexible comparing the normal car financing.

Ijara and Murabaha Financing:

Murabaha financing, is taken placed when an intermediary buys a property to lend further with a

clear title to it under the shari’ah (Islamic law of business working). It is about giving anything

on rent to the other person (for example if you’re financing anything which costs Rs.500,000 and

you and your borrows agreed on a term on selling it on Rs. 550,000 then it’s allowed and not

Haraam). It’s also different from Normal car financing/loan in terms of repayment rate, in

normal; the rate varies or gets fixed according to your income but in Ijara and Murabaha the cost

is decided first which can not be changed by anyone.

And it’s important to note that it prevents from Riba. For example if you delay in repayment then

Bank doesn’t have any authority to penalize you for it but yes they will ask you the

circumstances of why you delayed the payment yet will not ask for any penalty that you have to

pay.

Difference Ijara and Murabaha Financing:

Murabaha is a fixed rate and also for short term, But Ijara can be for long term.

In Murabaha you have to submit anything worth the same as security. While in Ijara, you

don’t have to provide any security.

Similar to Murabaha, in Ijara you have to pay a certain amount of fair percentage on

return.

In Ijara the ownership does not transfer until the full payment while in Murabaha, the

ownership transfers to the other hand on the day that person made his first payment.

Reasons for taking Ijara instead of Murabaha Financing:

To avoid the risk

To go for lease and long term profits instead of short term.

Ijara does not require credit evaluation.

In Ijara the ownership is not easily transferable.

Due to long term profit, In Ijara you can earn more as compare to Murahaba financing.

The rate is a bit high which is easily to get more profits and in Pakistani people is 65%

preferring Ijara financing.

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Pillars Of Ijara:

Muajjir:

A person who give something for hire – Lessor, landlord, owner etc.

Musta’jir:

A person who takes on hires – Lessee, tenant, renter etc.

Ma’jur:

A thing given for rent

Al-Manfaah:

The benefit from a thing – usufruct, services etc.

Ujrah:

Price or fee given for the payment of rent or lease

Sighah:

Offer (Ijab) and Acceptance

(Graph source: Slideshare.net)

Ijara

h

Based on Subject Matter

Tangible asset

Labour

Description of asset

Based on The Contractual Relationship

Operating lease

Financial lease

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Types Of Ijara:

Simple Ijara (Operating lease)

Ijara Thumma-Al bay (Financial Lease)

Simple Ijara (Operating Lease):

It is the simplest form of Ijara loan, in this the risk is much high because the lesser has to pay the

maintenance cost like the damages the borrower made lesser has to pay for it.

Ijara Thumma-Al bay (Financial Lease):

Normally used and offered by Islamic bank as financial intermediaries in: Obtaining desired

asset ,

Obtaining cash money for various purposes

Choosing the best car loan for you:

The best car loan is based on your income the more your income is the more easily you can pay

your repayments but the 75% of the people in Pakistan belongs to Middle class, the ones who

doesn’t have high amount of income that’s why they prefer getting Ijara finance for their

vehicles and moreover, as comparing both of the loans Normal (Also known as Personal loan)

and Ijara (Islamic banking loans) Ijara has significant easiness in term of payment and

repayment or rate flexibility. Like in personal loan, there are two types of loan (Secured and

Unsecured) in both of them the rate is variable and goes up if your income goes up and goes

down if your income goes down and sometimes or in some cases it got fixed and in case of

nonpayment they have authority to take caesurae of your vehicle and can penalize you if they let

it to you plus they have right to plus up the repayment rate while in Ijara (Islamic car financing)

the rate is fixed or the amount above principle is already decided before paying (Like if you are

getting Ijara for a car costs RS. 800,000 and during the documentation for it you decided to pay

RS.80,000 extra for a short term or for a long term and they both agreed to get in RS.880,000) so

this kind of loan is what Pakistani is getting attracted to. Ijara financing has taken over

the economy because it’s easily affordable.

Type of loan suits best for Pakistan:

As we know that 40% Pakistani people lives below poverty line and those people do not have

enough things live. So, apparently they cannot afford to get a loan and the rest 40 per cent of the

people belongs to middle class and then rest belongs to upper class. So, the only 60% out of

100% I am very good at noon and for that text you personally 60 per cent on 35 per cent. So

people don't usually get this and they will not try to get a loan due to the huge amount of money

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in personal or any kind of loans. So, here we are focusing on 35% of the eligible people

preferring Ijara car loan instead of personal finance is involved in car loan. When one can get car

through his or her position on the basis of promotion of the company all this process belongs to

the personal car financing. So, in my opinion Ijara provides the best loan one can get.

Terms for applying for loans (Both):

There is various documentation which has been involved in applying for loan. There are certain

conditions through which you can have to get a loan and there are processes which you have to

go through these steps;

Your income must be enough to bear the repayment.

In personal loan you have to provide security to get a loan while in Ijara you don’t have

to put anything for the security.

You must have anything worth the same as your vehicle, to get a loan for your car.

You must have good credit history but in Ijara, you do not need credit history (But you

have to agree on the terms and you must be able to pay according to your income.)

You have to agree to the terms about getting penalize if you delay a payment.

You atleast needed 2 or may be 4 guarantors, who guarantee that you can be tested and

can have their loan.

There are the main steps you have to go through in both of the loan procedures, it takes time to

confirm all the things but once it got confirmed you will able to get loan from them.

Impact of applying Ijara instead of Personal loan on Pakistani economy:

They are creating a positive impact on economy as on one side car loans (personal) having

constant or going down where the Islamic banking or Ijara financ ing getting their guards high

and creating a huge revenue on Pakistani economy and as we see throughout the years. It has

given a lot of benefits and revenue on the Pakistani economy.

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(Graph source: Google Images)

Conclusion:

Concluding this topic, as comparing both of these Loans we have come to the point that we need

to go to that loan which is income friendly and can pay the full repayments. As we are getting on

Ijara financing, you should have to go towards the that loan which is supporting your uses and

try to avoid the type of loans which does not support you income or you will unable to pay but in

this case Ijara is an income friendly which has opened the gates for having a car for yourself with

the acceptable repayment with or without security purposes.

Car financing can also be called as car loan, the party is getting car loan must have a good

credibility of availing and paying back that loan in the time given by the intermediary between

both the parties. There are; Short term secured loans and long term Secured loans; Short term

secured loans: In short terms secured loans, due to the short term or within a year repayments

Lender usually high up the rate of repayment like if normally a person is paying 8% then he have

to pay 12% in short term secured loan while other things remains same. Like in personal loan,

there are two types of loan in both of them the rate is variable and goes up if your income goes

up and goes down if your income goes down and sometimes or in some cases it got fixed and in

case of nonpayment they have authority to take caesurae of your vehicle and can penalize you if

they let it to you plus they have right to plus up the repayment rate while in Ijara the rate is fixed

or the amount above principle is already decided before paying so this kind of loan is what

Pakistani is getting attracted to.

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Furthermore, As comparing both of the loans which have been going up but in Ijara that has been

creating a positive impact and most of the Pakistanis are preferring Ijara for their future loans

and you should go for the loan which collects a huge revenue and gives you adequate easiness.