Car & home
finance calculator

Three structures, three different sums

Most calculators that offer an "Islamic" option print the same amortising instalment under a different heading. That is not what the bank is selling you, and it hides the things that actually differ — who owns the asset, what happens if you settle early, and what is left to pay at the end.

Conventional

The bank lends, you own the car. Each instalment is part interest on the balance outstanding and part principal, and the payment is level across the term. The interest portion is large at the start and small at the end.

Ijarah — a lease

The bank buys the asset and leases it to you. It owns the asset during the term; you pay rent. The monthly figure is usually lower than a loan instalment on the same car, and the reason is the residual left to settle at the end — not a better deal. That residual is a real payment, and it is the single thing people are most often surprised by when a lease finishes.

Diminishing Musharakah — co-ownership

You and the bank own the asset together. Each month you buy back a unit of the bank's share and pay rent on the share it still holds. Because the bank's share shrinks, the payment falls every month rather than staying level — the first payment is the highest you will ever make, and the last is the lowest. Buying extra units early cuts the rent on every month after that, which is a genuinely different early-settlement position from a loan.

Is Islamic financing cheaper?

Not automatically, and anyone who tells you otherwise is selling something. These products are priced against the same benchmarks as conventional lending, so the totals usually land close together.

There is one real arithmetic difference: at the same nominal rate, Diminishing Musharakah works out somewhat cheaper overall than a level-instalment loan, because the principal reduces faster and there is less outstanding to charge rent on. On a 1,000,000 facility over 5 years at 20%, the rent totals about 508,000 against about 590,000 of interest. But the early payments are higher, and the rate you are actually quoted matters far more than the structure. Compare the total cost of the specific offers in front of you, not the labels.

What this does not include

• Processing and documentation fees.
• Insurance or takaful, which is usually compulsory and often financed on top.
• Tracker charges on vehicles.
• Rate resets. Most facilities here float against KIBOR and reprice periodically, so a figure worked out today is a starting point rather than a promise.

Questions

What is the difference between Ijarah and a conventional car loan?

In a conventional loan the bank lends you money, you own the car, and you repay principal plus interest. In Ijarah the bank buys the car and leases it to you, so the bank owns it during the term and you pay rent. The payment is often lower because a residual value is left to be settled at the end — and that residual is a real payment, which is where lease deals surprise people.

How does Diminishing Musharakah work?

You and the bank co-own the asset. Each month you buy back a unit of the bank's share and pay rent on whatever share it still holds. Because the rent falls as the bank's share falls, the payment falls every month rather than staying level — and buying extra units early reduces the rent on every month that follows.

Is Islamic financing cheaper?

Not automatically. These products are priced against the same benchmarks as conventional lending, so the total cost is often close. At the same nominal rate Diminishing Musharakah works out somewhat lower than a level-instalment loan, simply because the principal reduces faster — but the early payments are higher, and the rate you are actually quoted matters more than the structure. Compare the total cost of the specific offers in front of you.

Which rate do I enter?

The one the bank quoted you, as an annual figure. For a floating facility that is the current all-in rate, and it will move.

Does this work for home financing too?

Yes — the arithmetic is the same. Diminishing Musharakah is the structure most Pakistani banks use for house financing, so that mode is the relevant one for most home deals.

Are my figures sent anywhere?

No. Everything is worked out in your browser, and the page makes no network request carrying what you type. Figures are kept only in your own browser's local storage.

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