A

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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 takingIjara 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)
Ijarah
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 financing 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.