Taking Interest

Basics

1. In any case where a person owes a debt to another Jew whether it is because he borrowed money or because he hired him and owes him or because he rented something and didn’t pay yet, it is forbidden to pay more than the actual debt because of the prohibition of taking interest.
2. It’s forbidden for the borrower to do a favor to the lender if he would not have done it otherwise (if not for the loan). Even if the borrower would have done a certain favor if not for the loan, the borrower may not do that favor in public unless they have a good relationship and the borrower has done public favors for the lender in the past.
3. There’s no prohibition to do a non-financial favor after the loan was paid up.
4. If neighbors have a good relationship and commonly borrow without being careful to return everything they borrow, then there is no prohibition of interest as the neighbors aren’t borrowing but rather gifting one another. However, if neighbors do not such a relationship then a neighbor who borrows a half a bag of sugar is borrowed only that amount may be returned unless the amount difference is insignificant (about which people don’t care) or if one is unsure how much one borrowed one may return an amount to be sure the loan is repaid.

Heter Iska

Because of the difficulty of abiding by all the details of loaning without interest, there’s an institution which is a contract set up by the Rabbis to conduct a business loan without violating the Torah prohibition of interest. This is only a general overview and not a procedure to be done oneself. The Heter Iska is based on the idea that a money deposit is considered the property of its owner irrelevant of where it may be and so the profit that the guardian makes from it belongs to the owner. However, a loan is considered the money of the borrower and the profits belong to the borrower who is then only obligated to return the capital without interest. The Heter Iska splits the money in two, half (or a percentage) is a loan on which the borrower doesn’t pay any interest, and half is a deposit with which the receiver may use for business and the profits go to the owner. One condition of the agreement is that the borrower isn’t trusted to say that he lost money unless he proves it with acceptable witnesses and he isn’t trusted to say that he didn’t profit unless he makes a Shevuah (biblical oath) that he didn’t profit. Another condition is that if the borrower pays the agreed amount (above the original capital) he doesn’t need to prove that he didn’t make any more money. Therefore, at the end of term, the receiver returns the half which is a loan (while keeping the profit made from that half) and returns the deposit along with the profit he made from that half up to the amount agreed upon (and if he didn’t profit that amount, unless he proves it he must still pay the agreed upon amount, and if he profited more, he’s exempt from paying more). There are many other conditions and one must consult with a reliable orthodox rabbi regarding each situation and how to draw up a Heter Iska.