Financing: Alluring Ways to Fall into Riba in a Car Transaction

The car transaction described by you is not permitted and appears to fall into the definition of Riba, hence unlawful (haram). The bank pays the cost of purchasing the car on your behalf to the seller, and then adds 20% extra for you to pay the bank in instalments. In other words, you will be taking a loan on interest from the bank in order to purchase the car, similar to a house-mortgage.

However, if the bank purchases the car first, takes it in its possession by bearing its risks, and then sells the car to you with an increased price, it would be permitted. Thus, if you can convince a bank to purchase the car in their own name, and thereafter add 20% to the original cost and sell the car to you, and that you pay the full price to them in instalments, it would be allowed and not considered a usurious transaction.

Another alternative is the seller himself including the additional 20% charge in the cost and selling the car to you with the payment being in instalments. The seller has a right to sell his car at whatever price he wishes, thus if he was to add the 20% to the X amount and sell the car to you at a fixed price and both parties agreed upon this, it would be permitted. In this case, the payment in instalments will be directly to the seller and not a third party. However, this alternative can only be availed of if the seller is willing to accept deferred payment in instalments and does not require money instantly.

And Allah knows best