Personal Loans

1. Obtaining a Loan

One who borrows money from a Jew is not allowed to pay interest or give the lender any benefits or favors — even voluntary — in return for the loan.

It is also not permissible for a borrower to send a gift to a prospective lender in order to prompt him to give a loan. It is permissible, however, for a borrower to send a small gift (one that is not obviously related to the loan) to a prospective lender, to facilitate asking him for a loan. The borrower, however, should not say explicitly that the present is related to a loan.

When asking for a loan, a borrower may remind the lender of previous favors he had performed for the lender. Accordingly, it would be permissible for the borrower to say to the lender, “Lend me some money and help me out the same way I helped you when you were in need.”

A borrower is allowed to pay a third party to arrange a loan, provided that the third party does not forward this money to the lender.

Someone borrowing money from a free-loan society is not allowed to give anything to the gabbai of the loan society — either before or after the loan is made.

B. Thanking the Lender

The borrower may not give the lender a gift to show appreciation for receiving the loan, whether it is given when the loan is received, at the time of repayment, or later.

Some poskim do not permit the borrower to thank or bless the lender upon receiving the loan (for example, saying “yasher koach”).

It is therefore preferable for the borrower to say to the lender, “As you know, I cannot thank you for the loan, but thank you anyway for going through all this bother,” or, “I would have liked to thank you if not for the issur of ribis.” If, despite this prohibition, the borrower thanked the lender for a loan, the lender should reply, “There is no need to thank me for this.”

This would not be necessary in the following situation: Reuven tells the borrower that the loan is not from him, but from Shimon — even though this is actually not true and was only said to spare the borrower embarrassment. Here, the borrower is mistakenly thanking Reuven only for his bother, thinking that the loan is indeed coming from Shimon. Therefore, Reuven need not worry about violating the prohibition of ribis when the borrower thanks him.

According to some authorities, the borrower is permitted to bless or thank the lender as long as some time has elapsed since repayment of the loan — even if it is only a brief period. Others, however, do not permit it.

C. Costs and Expenses of the Lender Relating to Giving the Loan

If funds borrowed from a bank were given as a private loan and the lender is paying interest to the bank for these funds, the lender is not permitted to charge or recover that cost from the borrower unless a heter iska was used at the time that he gave the loan.

Certain bank charges and expenses can be passed along to a private borrower.

D. Inflation and Devaluation

Even if the cost of living is much higher at the time of repayment than it was at the time of the loan, one may still not request to be repaid more than the original loan amount.

Even if the currency was devalued by the government, the borrower may not repay an amount equal (in real terms) to the original value of the currency.

If one wishes to avoid these problems, he should, from the very start, base his loan on a heter iska, whereby the difference in value due to inflation (or other causes) can be included in the investor’s (i.e., the lender’s) assumed share of profits.

2. The Borrower’s Conduct During the Loan Period

If, despite the prohibition, the borrower performed some favor, the lender should either pay for it or promise to reciprocate in kind.

Example:

If prior to the loan the borrower had never sent mishloach manos for Purim to the lender, then he is not permitted to do so now. If the borrower sends mishloach manos anyway, the lender should either not accept it or send his own mishloach manos to the borrower.

If, on the other hand, the borrower used to send mishloach manos to the lender before the loan, he is permitted to send him an ordinary mishloach manos. It is questionable, however, if the borrower is allowed to send an extraordinary or very costly mishloach manos, even if he had done so in the past.

The borrower may not do favors for the lender even if he made a heter iska of the type whereby one-half of the funds is a loan and one-half is an investment. However, if the borrower used a heter iska in which the entire amount is considered an investment, favors are permitted.

A lender should not request a favor from the borrower in return for the loan even if the lender knows that the borrower would have agreed in any case.

Example:

B allows others to use his car if they request to, but L would not have felt comfortable asking for the car if not for having lent B money. Therefore, L is not permitted to ask for the car.

3. The Borrower’s Conduct after Repayment of the Loan

There is a dispute among the poskim if the borrower is permitted to thank the lender after the loan has been repaid.

Some authorities permit the borrower to send an unsolicited gift to the lender provided that it is not apparent from the type of gift that it was done in recognition of the loan (even though that was, in fact, the intention). If some time has elapsed since the repayment of the loan, the borrower may give the lender anything he wishes, provided that he does not indicate that it is in return for the loan. The definition of “some time” will depend on various considerations, including the size of the loan. The object is to ensure that an observer would not connect the gift with the loan.

It should be noted that if a loan is repaid with a check, the loan is not considered repaid until the check is actually cashed. Therefore, the borrower cannot thank the lender or send him a present (even if the above rules are observed) until the check is cashed.

4. Repaying the Loan

There are circumstances where even small amounts of money or seemingly minor actions might constitute ribis when connected to the repayment of loans. In these cases, great care must be taken to ensure that the halachah is observed. (As a side point, if the borrower feels cheap by acting in so exact a manner, he can explain to the lender that he is only doing so to prevent everyone involved from violating the issur of ribis.)

If the borrower does not have the exact cash needed to repay the loan (for instance, he borrowed $96.50 and has only a hundred-dollar bill), and the lender does not have change handy, the borrower should specify either that the lender pay the excess to charity on the borrower’s behalf or that the lender return the excess to the borrower at a later date (and in the meantime, the lender may use the difference for his own purposes).

Where this is not possible (for example, when repayment is not made to a person, but by way of a charity box), the borrower may pay with a larger bill to save himself from coming back another time with the exact change.

If the repayment of the loan is made through a messenger, and the borrower lacks exact change, he may give the hundred-dollar bill to the messenger. He should, however, advise him of the actual amount owed ($96.50) and indicate to the messenger that he can keep the extra amount himself. The messenger, if he so desires, can then give the full $100 to the lender.

If Reuven (the lender) tells Shimon (the borrower), “Don’t repay me, but give the amount you owe me to Levi,” Shimon may pay Levi more than the amount borrowed.

A borrower repaying a loan by check may round up to the nearest dollar since it is common to do so as a matter of convenience.

If the borrower is uncertain of the exact amount of the loan he may give the lender the benefit of the doubt and pay the higher amount.

Even if the borrower is certain that he borrowed less than the amount claimed by the lender, he may still be allowed to pay the higher amount provided that he is doing so only to avoid an argument.

If, however, the borrower agrees to pay the higher amount out of a feeling of gratitude for having received the loan in the first place, he may not repay more than the amount he borrowed. In that case, it is advisable that the borrower and lender consult a rav to determine how to deal with the amount in dispute.

Alternatively, the borrower could give the extra money to the lender, stating that if the lender will at any time realize that the borrower had indeed owed only the smaller amount he will return those funds to the borrower.

If the lender lent the borrower money at one location (the lender’s house, for instance), the lender may ask the borrower to deposit the repayment of the loan somewhere else (in the lender’s bank), provided that this is easily done. If the borrower wishes to please the lender by repaying the lender in a different country, he is permitted to do so as long as he was not obligated to do so.

B. Repaying with Funds Held in a Term Deposit

Reuven is in possession of a locked term bank deposit of $1,000 with interest of $100 (due at the end of the term). Reuven is allowed to sell the term deposit (and the interest that the bank owes him) to Shimon for $1,000. The extra $100 that Shimon gets is not considered ribis because the transaction is considered a sale and not a loan. (The proof to this is if the bank defaults on the loan, Shimon would now suffer the loss and not Reuven.) The same principle applies even if Reuven wanted to sell only part of the term deposit.

There is a debate among the poskim whether or not the above investment must be transferred to Shimon in a formal, legally binding manner. Some consider the whole transaction not as a loan, but as payment (of $1,000) toward the purchase of the bank’s obligation (of $1,100) to Reuven, even without a legally binding transfer. Others disagree. It is therefore preferable to make a legally binding transfer of the term deposit.

If Reuven borrowed $1,000 and later decides that he would rather repay with $1,100 that he has locked in a term deposit, all opinions agree that a legal transfer of the term deposit from Reuven to Shimon must be made in order for Shimon to receive the amount due to Reuven from the bank. In this case, Reuven may only repay the $1,000 loan with the term deposit of $1,100 if he would have sold it to anyone else for the same price, i.e. $1,000.

C. Repaying with Merchandise at a Reduced Rate

Usually a loan of money is repaid with money. If the lender agrees, however, the borrower is permitted to repay the loan with merchandise at the retail price. Most opinions would not permit the transaction in a case where the lender agrees to accept payment with goods only at a discounted price. However, a borrower may discount the merchandise if he would do so for any other customer in order to generate ready cash.