Short answer
Conventional car finance with interest (an APR) is haram, like any interest loan, and that includes most PCP and hire purchase deals. Halal options exist: paying cash, 0% finance with no interest added later, a dealer selling on installments at a fixed higher price, or Islamic car finance (murabaha or ijara).
Borrowing on interest to buy a car is haram. Buying the car from the seller on installments at a higher price fixed in the contract is permissible. A 0% deal is permissible when no interest is ever added; signing a contract with a late interest clause is disliked, so use it only if you are sure to pay every installment on time.
The four schools agree on this.
Explanation
Most car finance is a loan. A bank or finance company pays the dealer, and you repay the finance company the price plus interest, shown as an APR. Hire purchase (HP) and personal contract purchase (PCP) usually work this way too. These are interest loans, and owning a car is not the kind of necessity that permits riba; see Are loans haram?
Halal ways to get a car:
- Cash, even if it means a cheaper car for now.
- 0% APR finance, where you repay exactly the price. Check the contract for interest that kicks in if you miss a payment, and set up automatic payments.
- An installment sale from the seller. A dealer may sell for $20,000 cash or $23,000 over three years. Choosing the higher deferred price is allowed, as long as the price is fixed at the start and nothing is added for paying late. The Prophet ﷺ bought food on deferred payment.
- Islamic car finance. In murabaha the provider buys the car and sells it to you at a known profit; in ijara it rents the car to you. These are halal in principle when the provider really owns the car first.
- Leasing, which has its own conditions: see Is leasing a car halal?
What separates a halal installment sale from riba is that the price is agreed once and never grows with time. If the price rises because you paid late, that increase is riba. For buy now, pay later plans, see Is buy now pay later halal? Contracts vary, so have the paperwork checked by a mufti.
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
A sale at a higher deferred price is trade; an interest loan is riba.
Sahih al-Bukhari 2068
Sahih... اشترى طعاما من يهودي إلى أجل ...
"He bought food from a Jewish man on deferred payment."
Buying on credit from a seller is lawful.
Sahih Muslim 1598
Sahih... آكل الربا وموكله وكاتبه وشاهديه ...
"He cursed the one who consumes riba, the one who pays it, the one who writes it and its two witnesses."
Paying interest on a car loan is taking part in riba.
Where the ruling is recorded
- al-Hidaya, Kitab al-Buyu', Bab al-Murabaha wa al-Tawliya. A higher price may be set for deferred payment when it is fixed in the contract.
- An Introduction to Islamic Finance (Mufti Taqi Usmani), Chapter on Murabaha. How a financier must own the asset before selling it on at a profit.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.