0-Interest Loans and Why is Interest Haram?

0 interest car loans and why is interest haram

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0-Interest Loans and Why is Interest Haram?

Today’s Daily Smartening is about no-interest loans and Islamic banking. Did you know that it’s possible to get a loan without paying interest?  So 0-Interest car loans really are a thing!

In Islam, paying interest is considered “haram” – which means forbidden. So if you get a loan from an Islamic financial institution, you do not pay interest.

Can I Borrow from an Islamic Bank if I’m Not Muslim?

Yep. They don’t require you to be Muslim to get a loan.  Of course, all the other requirements still apply – like your income, credit history, etc.

How Do the Banks Make Money Then?

Usually, Islamic banks use “murabaha” financing. Basically, the bank buys whatever it is you’re trying to buy, like a car or a house or whatever. Then they sell it to you at a marked-up price. So instead of “lending you money”, it’s more like making a purchase (e.g., the car) and then selling that purchase (to you).

What are the Benefits of Using an Islamic Bank?

  • Your payments are a fixed amount over the length of the loan. There are no variable interest rates. Even if the financing goes up in the financial markets, your payment is set and does not go up over time.
  • There are no late payment charges.
  • There is no compounding of interest (well, there’s no interest with these loans!) or profit.
  • Sometimes Islamic banks are more open to working with the customer if they hit a rough patch. For example, if you lose your job, they’re more likely to give you a reprieve from making payments for a period of time (like 6 months or so).

I live in the US. Are there Islamic Banks I can use?

Yep. There are currently about 25 Islamic financial institutions in the United States. Some of them include:

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It’s not a lot right now, but they are growing. According to Ernst & Young, Islamic Finance is expected to grow 20% per year for the next few years. See this report for the details.

Some banks who offer Islamic lending in the US include:

  • The Bank of Whittier
  • Amana Mutual Funds Trust
  • Manzil USA
  • American Finance House, LARIBA Bank
  • MSI Financial Services Corporation
  • Dubai Islamic Bank
  • Standard Chartered Islamic banking
  • JP Morgan Chase
  • National Bank of Kuwait

Why is Interest Haram?

Remember – “haram” means “forbidden” in Arabic. So why is interest haram?

Well, to answer this question, I asked a Muslim friend of mine. She has studied the Koran, and she even memorized it.  Here’s her answer:

Islam is all about being a community and helping others.

When someone borrows money from you, they obviously have no money. So why in the world would you take extra money from someone who has no money? Then they’ll need to pay back what they took and add interest on top of that, and that is sinful. You’re supposed to help poor people, not make it more difficult for them.

Another reason is because by taking interest, rich people keep getting richer and poor people keep getting poorer.

Also, if you charge someone interest, you are taking money with nothing in exchange. You did not sell something; you didn’t work for it. You’re taking money that you don’t deserve.

That’s why collecting interest is haram in Islam.

There you go!

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Michele Swensen is a writer and web designer who loves learning, animals, writing, reading, and playing the piano. She’s a member of Mensa and a college graduate.
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Michele Swensen is a writer and web designer who loves learning, animals, writing, reading, and playing the piano. She’s a member of Mensa and a college graduate.
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