Sharing you my personal experience. Went to Dubai Islamic Bank for seeking car ijarah. Filled the form. The bank's agent visited my home, my office, and took bank statement of my salary account directly from the branch himself. After 5-6 working days, my case was approved, and was asked to pay down payment. By the end of 5th month of approval of my case, I had still not paid the down payment. After 5 months, I contacted the agent, to ask if I could still get the finance after paying down payment, to which he astonishingly replied in affirmation. Just to give you an idea that owing to so much competition among banks and fulfillment of personal targets, they may be willing to take down payment even after 5 months. In the end, I didn't go for lease
They will charge interest on outstanding principal if you don't pay any one or more installments on time, but bank won't take it as its income and all would go to charity. If you didn't pay three consecutive installments, your car will be seized, sold by the bank, and proceeds of it would be applied first towards settlement of bank's outstanding loan plus rent, and remaining amount, if any, would be returned to you. Tracker and insurance is must for all banks.
The bank becomes a partner with you by sharing some amount in the price of car. You use the car and the bank charges rent on the usage of car. Your installment is made of four things:
1. Fixed rent (Principal), 2. Variable Rent (charged for using car. It can also be fixed but the margin is usually higher than market), 3. Additional Rent (tracker fee per month) 4. Advance rent (insurance premium per month)
What makes car ijarah dubious is the fact that Islamic banks:
Use the same mechanism for calculating variable rent as the one used by conventional banks for calculating interest on loan. As already told, some of the Islamic banks may also agree to fix the amount of rent, but normally, they keep such higher margin than market, that you ultimately end up paying more than what you would have paid, had you opted for variable rent mechanism;
Bound the customer to get the car insured from conventional insurance companies (which majority of Islamic scholars have declared impermissible).
In conventional leasing (CL), bank starts charging interest as soon as car is booked (as if you took a cash loan), but in Islamic leasing (IL), bank charges rent as soon as you take delivery of car.
In CL, if the car is lost, stolen, destroyed, or otherwise not fit to be used, the bank will still charge you interest, till insurance claim is settled, where as in IL, if the above happens, the rent is stopped immediately because the rent is charged on car usage (not on amount of loan given).
I am not issuing any fatwa as many prominent Islamic scholars have allowed car ijarah offered by Islamic banks, but best is to abstain from it and buy that which you can afford without going for ijarah, or alternatively if some one agrees to pay you interest free loan in good faith.