In an example provided by Sears, customers could buy a $400 item or group of items by making 10 biweekly payments over five months of $33, then decide whether to keep making payments, return the merchandise, or spend $220 to buy out the lease for a final cost of $553. That would be the equivalent of a 114 percent annual rate, according to Mierzwinski.
Murabahah: In this type of transaction, the bank purchases the property and then re-sells it to the buyer at a fixed profit. The property is registered in the buyer's name from the beginning, and the buyer makes installment payments to the bank. All costs are fixed at the time of the contract, with the agreement of both parties, so no late payment penalties are permitted. Banks usually ask for strict collateral or a high down payment in order to protect against default.
Ijarah: This type of transaction is similar to real estate leasing or rent-to-own contracts. The bank purchases the property and retains ownership, while the buyer makes installment payments. When payments are complete, the buyer gains 100% ownership of the property.