Default or late payment fee on car finance

Assalamu Alaykom,

I spoke to a website that was mentioned on the forum about buying a car as they seem to be sharia compliant, however they have a defined fee applied when there is a late payment or default on the monthly fee.
I am not sure if this is considered interest or penalty but I wanted to ask would this make the agreement non compliant ?

Thank you very much in advance


May Allah bless you.
Default/Late payment fees are usually considered as similar to interest.
Hence, it is not permissible to agree to such conditions.
However, there may be situations where agreeing to such conditions may be tolerated. This is with the condition that one must be sure that, he will not default and pay the interest.
In the UK, many of the credit contracts that are available, have default and late payment fee clauses. It is difficult to avoid them unless we don’t take anything on credit.
Scholars must come together and give clear guidance to the community on this matter. Until then, the best thing to do is, consult a local scholar for advice.
@Mufti_Faraz_Adam might have a general answer to give on this matter.

And Allah knows best!

Jazakallah Mufti Bilal for providing an insight into the pandemic of late payment fees or default payment fines,which is prevalent in every contract you sign, whether it is utilities, rent, council tax, phone bills etc.

1.But are these also considered as credit contracts, hence also fall under the preview of interest?
2. Or are they considered as breach of contract, hence can be charged as loss of revenue or charge for additional resources being used by the entity?
3. What is the alternative from shariah perspective to deter people from taking undue advantage and not breaching contracts?

Thank you Mufti Bilal for your prompt reply.
This is a difficult matter. I would be interested to know if anyone has tried to get a finance company to change or remove these terms…
The problem is even if you pay a deposit, late payment fees are charged on top not deducted from the deposit.
Any feedback is welcome.
Jazakom Allah Khayran.

Assalamu Alaikom Mufti Bilal,
I spoke to this company and they advised that if a person thinks that he is likely to default he can contact the finance company in advance to explain his situation ( e.g. reduction of income due to job loss, or because of the pandemic for example…) and the finance company will workout with him how much he can afford. This way they will not charge him the late payment fee and he can pay whatever he can afford.
Does this make the contract permissible ?

Thank you for your answer and we ask Allah to give you Barakah in your Knowledge, health and family.
Thank you

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May Allah bless you.
Restructuring debt payment without charging late fee payment or interest is permissible.

And Allah knows best!