It is a great mitzvah to provide loans to the needy. As we read in Deuteronomy: "If there will be among you a needy person, from one of your brothers in one of your cities, in your land that the L-rd, your G‑d, is giving you, you shall not harden your heart, and you shall not close your hand from your needy brother. Rather, you shall open your hand to him, and you shall lend him sufficient for his needs, which he is lacking."
Loans are also mentioned in Exodus: "When you lend money to My people, to the poor person [who is] with you, you shall not behave toward him as a lender; you shall not impose interest upon him." From here we learn that giving an interest-free loan is actually a Torah obligation. This remains true despite the fact that the lender could have used the money at that time to accrue interest in a bank or other type of investment.
Giving loans is one of the mitzvot for which one receives a reward both in this world and in the World to Come. In fact, it is considered a greater mitzvah than the mitzvah of giving charity because it is less embarrassing for a needy person to take a loan than to receive charity. In addition, by providing a loan in a timely manner, one can prevent a person from reaching a state of poverty in the first place.
In fact, if a person has a certain amount of money and receives two requests for it, one for charity and the other for a loan, he should give it as a loan. The person who is asking for charity is probably used to asking and will not hesitate to ask someone else, whereas the one who is asking for a loan is likely not used to such requests, and may have no one else to turn to.
To ensure that those who need a loan will be able to receive one, it is proper for each Jewish community to establish a free loan fund. Members of the city should donate money to the fund which in turn can be used to provide interest-free loans to locals in need. Those who contribute to this fund are continually doing mitzvot with their money, even while sleeping, eating, etc. Those who administrate the fund receive a great reward for this, as the verse states: "One who pursues charity and kindness shall find life, charity, and honor."
Following are some of the laws relating to this mitzvah:
To Whom Must One Lend
- When deciding to whom one should lend money, one should give precedence to one's own family members, then to members of one's city, then to the Jews in Israel, and finally to the Jews in the rest of the world.
- One should also extend loans to poor non-Jews. But one is allowed to charge interest from a non-Jew.
- It is also a mitzvah to lend money to a rich person if he needs it for some reason, but one should give precedence to the poor.
- One who is asked for a loan for an amount of money that he can afford, has an obligation to provide it—up to one fifth of one's wealth. More than that a person is not obligated to lend.
- The obligation, however, does not apply if the lender does not trust that the person requesting the loan will pay him back.
- It is preferable not to provide a loan to a person who will not be able to repay it in order to avoid demanding repayment of a loan from a person who cannot afford to do so, which is forbidden by halachah (see below).
- It is also a mitzvah to lend objects to people that need them. Although this is technically not included in the mitzvah of lending money, it is included in the general mitzvah of Ahavat Yisrael, loving one's fellow.
Recording the loan
- One should make sure to record the loan in a proper document. This is important even between friends or Torah scholars. Without documentation, it is possible that one party will make the simple mistake of forgetfulness.
- One may also call upon other people to act as witnesses, but documentation is better as the witnesses may leave the area.
How the Borrower May Use the Loan
- A borrower may not squander the money on risky investments, unless he has informed the lender beforehand of his specific intentions.
- Nor may the borrower waste the money on non-essential items in such way that he has nothing left to repay at the end of the term of the loan.
The Obligation to Repay Loans
- Immediately when the loan is due, the borrower is obligated to repay the money. In the words of King Solomon: "Do not say to your fellow, 'Go and return, and tomorrow I will give,' though you have it with you."
- If the borrower does not have the money, he must sell his possessions and even his home to repay the loan. He may only keep for himself the most basic necessities.
- One must sell his holy books and even a Torah scroll in order to repay a loan.
If One Cannot Afford to Repay a Loan
- One who owes money but cannot afford to repay it (either with cash or with his possessions) cannot be forced to work in order to repay his debt.
- Nevertheless, as long as one has not repaid his debt, he is called "a wicked man who borrows and does not repay." To avoid this moniker, one should endeavor to work and repay all loans.
- Any money earned through work must be used to repay the debt (with the exception of money used to provide for the borrower's most basic needs).
- Any gift the borrower receives must be used to repay the debt, unless the giver specifies that it is not to be used for that purpose.
- Certainly, one who owes money may not go on vacation or spend any money other than on basic essentials.
- It is clear that the money one earns should be used for repaying the debt and may not be given to charity.
Pressure to Repay
- If a lender knows that the borrower does not have the money or possessions to repay his loan, he may not pressure him to repay.
- In fact, he may not even walk in front of the borrower for it may remind him of the loan which is due.
- Although one may ask for a collateral, one should provide a loan even if the borrower has no collateral to give.
- If one wishes to keep the collateral as a repayment of a loan, it first must be appraised by a Beit Din (rabbinic court). It must be then sold to a third party, and the lender may keep the money up to the amount of his loan. Thirty days must pass after the due date of the loan before this process may take place.
- If one wishes to circumvent this process, he should make a condition at the time of the loan that if the loan is not paid on time, the collateral will be considered the property of the lender retroactively from the time of the issuing of the loan.