Is PCP Car Finance Considered Interest or a Permissible Lease in Islam?

Answered by Shaykh Muhammad Carr

Question

I want to purchase a car through PCP financing with fixed monthly payments that include APR. I do not plan to make the final balloon payment to own the vehicle—only the monthly installments. In this case, are the payments considered interest, or are they more like rent since the financer retains car ownership?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

I pray you are in good faith and health. Thank you for your question.

The payments are considered interest and therefore impermissible. Allah (Most High) emphasizes in the Quran,

“O believers! Fear Allah, and give up outstanding interest if you are true believers.” [Quran, 2:278]

In Personal Contract Purchase (PCP) finance, the bank or finance company buys the car and remains the legal owner until you finish all payments. However, the arrangement is not treated as a lease—it is a credit agreement. The monthly payments are structured to cover both:

1. The capital (part of the car’s price)
2. Interest (the cost of borrowing money over time)

Even though the bank holds ownership as security until the final payment, economically, it is lending you the money to use and potentially acquire the car. That’s why the payments include interest, unlike a pure lease, where you only pay rent for use without the option of ownership.

What is PCP?

PCP in finance stands for Personal Contract Purchase. It’s a type of car finance agreement where you pay monthly installments for a set period, and at the end, you can either:

• Make a final “balloon payment” to own the car,
• Return the car, or
• Trade it in for a new one.

The Difference between PCP and HP

PCP (Personal Contract Purchase): Lower monthly payments, but you don’t own the car unless you pay the large final “balloon payment.”

HP (Hire Purchase): Higher monthly payments, but you automatically own the car once the last installment is paid.

Substance Over Form

In car finance, agreements such as Hire Purchase (HP) or Personal Contract Purchase (PCP) are legally structured as hire arrangements: the financer remains the formal owner of the vehicle until all payments are completed. In substance, however, these agreements operate like credit contracts. The monthly installments cover both capital and interest, and the customer bears the economic burden of repayment, much as in a loan.

This hire-style form is chosen not because the essence is leasing, but because it strengthens the lender’s legal position: ownership remains with the financer, making repossession simpler in default cases. Thus, while the form is “hire,” the substance is clearly “loan with interest,” demonstrating how legal and financial practice often prioritises substance over form.

APR

APR, an annual percentage rate, is the yearly rate charged for a loan or earned by an investment, including interest and fees. In other words, the APR is the interest rate plus any additional fees the lender charges.

In practical terms, it has little relevance for the conscientious Muslim who strives to avoid engaging in interest-based transactions. Allah (Most High) emphasizes in the Quran,

“O believers! Fear Allah, and give up outstanding interest if you are true believers.” [Quran, 2:278]

Since the Annual Percentage Rate (APR) reveals all expenses associated with a loan, financial institutions are required to disclose the APR of a financial instrument prior to finalizing any agreement. While this practice eliminates uncertainty (gharar) regarding the loan’s cost, it is important to note that it does not necessarily determine its permissibility.

So, the APR provides a consistent basis for presenting annual interest rate information to protect consumers from misleading advertising. An APR may not reflect the actual cost of borrowing because lenders have a fair amount of leeway in calculating it, excluding certain fees. [Investopedia]

I pray this is of benefit and that Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefited from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.