Ann Barnhardt explained this well:
“Let’s say a person buys a $150,000 home on a 15 year mortgage at 5%. Purely for the sake of simplicity, let’s just say zero down. The amortization table shows that over those 15 years, or 180 months, at 5% interest, the monthly payment would be $1186.19 and that the total interest expense paid over the life of the mortgage would be $63,514.28. So, principal plus interest would be $213,514.28 for the $150,000 property.
Now here is an “interest-free” Sharia loan scenario. And bear in mind that I am dead serious here. I’m not making this up.
A musloid walks in to a “Sharia-compliant” lender and tells them that they want to buy a $150,000 property on a 15 year term. The Sharia-compliant lender then looks up what the going INTEREST RATE is. (Uh, Houston, we have a problem.)
In our example, it is 5% on a 15 year mortgage. The musloid banker then calculates the amortization table on a 15 year loan on $150,000 at 5%. (Uh, Houston, we’ve had some sort of major malfunction here.)
He sees that the total interest expense would be $63,514.28. So, the “Sharia-compliant” lender then offers to buy the property at $150,000 and immediately sell it to the customer for . . . $213,514.28. The customer then sets up a note to repay the $213,514.28 in 180 equal monthly payments of $1186.19 at “zero percent”, because $213,514.28 divided by 180 is $1186.19. Voila! Zero interest!
That’s it. I’m not kidding. I’m not making this up. If I was going to make something up, I would make something up that wasn’t totally, completely, laughably stupid.
Um, soooooo, tell me Mister Musloid, what EXACTLY is the $63,514.28 markup? Uh, isn’t that … interest? How was that amount calculated? Uh, didn’t you ping the interest rate market and calculate an amortization table to come up with that number? Yes.
Isn’t the borrower paying the lender for the use of his money over the 15 year term? Yes.”
Interesting post there. Kinda reminds of a well-known used car guy in my neck of the woods. He’d buy your $2000 used car for $500. Then he’d present you with $1500 cash as a gift. Just because he liked you.
The whole idea was to avoid paying the vehicle transfer tax. Eventually the revenuers shut him down. Whether or not he went to jail I don’t know.