Question
I manage the funds of a yeshiva and am responsible for a large payroll every Rosh Chodesh. In order to avoid last-minute pressure and paying late I try to maintain a balance in the bank that will cover me for a few months in advance. My friend, who is a businessman and also manages a Kollel, is not so well-organized. Almost every month before Rosh Chodesh he turns to me for a short-term loan until he manages to arrange for the funds that he needs. I am happy to help him with his Kollel and don’t charge any interest. However, often he is late paying me back and I have to keep bothering him until he finally repays. When my friend saw that I hesitated to keep lending him money because of the frequent hassle, he offered to accept upon himself a fine to pay an extra two thousand dollars out of his own pocket if he is late repaying the loan. May I accept his offer or is there a problem of ribbis?
Answer
You say that he will pay the extra two thousand dollars out of his pocket but the money he borrows is for his kollel. If the Kollel is the borrower and he is the one who pays the fine you do not have any problem since the Torah only forbids interest that is paid by the borrower. If a third party pays a lender in order to encourage him to lend money to a specific borrower and the third party will not be reimbursed by the borrower, there is no issue of ribbis. This is the explicit ruling of the SA (YD 160, 13): “C may give a coin to A and tell him to lend money to B if B does not reimburse C.”
Therefore, if you structure the loan so that your friend’s Kollel is the borrower but your friend will pay the fine there certainly is no issue. The problem with this arrangement is that you may have more problems recovering your loan because if your friend has money and his Kollel does not, your friend will not have any obligation to repay the loan. Therefore, you probably are better off lending the money to your friend and not relying on this leniency.
However, even if your friend is both the borrower and the one who must pay the fine, it seems the Mishna (BB 168A) permits your arrangement. The Mishna discusses a lender and his borrower who repaid a portion of his loan, and had an agreement that the borrower will return the loan document to the lender if the borrower fails to repay the remainder by the due date. The issue is if this agreement is valid. The point of the agreement is that the lender may then collect the entire loan even though it was partially repaid.
The Rishonim note that the only reason some maintain that the agreement is invalid is because the agreement entails a conditional fine which may constitute an asmachta – an agreement that the one who became obligated did not expect to be liable for. Since there is no mention of an issue of ribbis, the Rishonim infer that there is no issue of ribbis even when the borrower repays his lender more than the amount he borrowed.
One early Rishon who maintains that there is no issue of ribbis at all is the Ri Migash (commentary to this Mishna). His rationale is very important because we derive many rulings covering other situations from it. He bases his explanation on the Gemara (BM 63B) that states that the concept of ribbis only applies when a borrower pays his lender in order to receive a loan or to extend the repayment terms of a loan. The Ri Migash reasons that here the borrower was not paying money to borrow the money since if he pays on time he will not pay extra. And even if he does not repay on time and needs to pay extra, the additional amount is not in exchange for the loan or for better repayment terms since the due date for repayment of the loan was not extended as a result of the fine.
The Rashbo (res 1, 651) cites and agrees with the Ri Migash. However, he maintains that lending with a fine for late repayment is not totally permitted since the lender may receive more than he lent. He calls this arrangement ha’aromas ribbis (a trick to pay interest), which is rabbinically forbidden. The source for the prohibition of ha’aromas ribbis is a Gemara (BM 62B) that says that a specific scheme is prohibited because it constitutes ha’aromas ribbis.
The Rashbo adds that the fact that the Gemara in the case cited earlier did not invoke this prohibition does not indicate that it does not apply. The reason is that one who violates the prohibition of ha’aromas ribbis is not obligated to return the money that he received illegally and, in the case of the Mishna when the loan document is returned to the lender, the extra money that the borrower pays only becomes ha’aromas ribbis post-facto. Thus, even though one is not allowed to insert such a condition into a loan because it could cause the payment of ha’aromas ribbis but post-facto, which is the subject of this Mishna, ha’aromas ribbis is not an issue.
The SA (YD 177, 14) follows the ruling of the Rashba and writes that one may not include this type of penalty clause in a loan contract because it is ha’aromas ribbis.
There a few noteworthy comments that should be made. One is that the Rashbo is the stringent opinion and there are many Rishonim, including the previously cited Ri Migash (also the Sefer Hatrumos, Ritvo and Tur among others) who maintain that this arrangement is perfectly permissible.
The second point is that perhaps the Rashbo would agree that in your case the fine is not considered ha’aromas ribbis. In the case which the Gemara (BM 62B) classified as ha’aromas ribbis, the lender was clearly trying to be paid interest and just found a way to circumvent the prohibition of ribbis. In your case you were not trying to collect ribbis but just to ensure timely repayment of your loan. This point is noted by the Ginas Verodim (YD 6, 1).
The third point is that the SA (163, 3) rules that the prohibition of ha’aromas ribbis only applies at the stage when the deal is made. But if a deal was made in violation of the prohibition of ha’aromas ribbis the lender is still entitled to collect the entire loan.
Despite all these comments one is not allowed lekatchilo to insert this type of penalty clause. However, the Ramo cites the ruling of the Rivash (res 335) that the prohibition of the Rashbo applies only if the agreement is a loan agreement. Thus, if one sells an object, he can insert a penalty clause that if the customer pays late, he will be obligated to pay more than the price.
This ruling can be very helpful if one wishes to insert such a penalty clause, since the Chavos Da’as (161, 1) writes that whenever one does not repay exactly the same object as the object that he borrowed, the transaction is classified as a sale and not a loan. For example, if you structure your loan so that you lend dollars and will be repaid in shekalim, you may insert the penalty clause since the transaction is halachically classified as a sale and not a loan, since dollars and shekalim are different.
It is very important to note that the reason the extra amount that the borrower has to pay is at worst only ha’aromas ribbis is because the penalty was a fixed, one-time payment for being late. However, if you structure the penalty so that the penalty grows with time, there is no proof from the Gemara that it is permitted and the rationale of the Ri Migash does not apply.
An example of a penalty that grows with time is if a person lends money and agrees to give the borrower three months to pay without incurring any interest, but if the borrower fails to pay at the end of three months, he will need to start paying interest.
According to all opinions this arrangement is not permitted. However, there is a major dispute concerning the precise nature of the ribbis prohibition that is involved.
In order to understand the dispute that is involved it is necessary to introduce another dispute. The Gemara writes that the only type of ribbis that was prohibited by the Torah is ribbis ketsuso meaning ribbis that was fixed in the original loan agreement, for example a person borrows money at six percent interest a year. Since the terms of the loan include interest on the loan, according to all opinions, the ribbis is forbidden by the Torah.
There is a dispute between the Rambam (Malveh 6, 3) and many others, including the Ra’vad, whether the Torah forbade one to later charge money in order to extend the period of an interest-free loan for an additional period of time.
The Rambam contends that since when the Torah forbade ribbis it wrote, “It is forbidden to lend money and charge interest,” the Torah’s prohibition is violated only if interest was included in the terms of the loan at its inception. However, if at the time the money was given by the lender to the borrower there was no interest charge, the Torah did not forbid charging interest even if the ribbis clause is inserted when the lender grants the borrower additional time to repay his loan. The prohibition against this, according to the Rambam, is rabbinic.
The Ralbach (Res 103, page 52A) and Mabit (res 51, page 16A) have a dispute if the terms of the original loan agreement were that there is no interest if the loan is repaid by a specific date, but if it is not repaid by that date the loan will bear ordinary interest. The Ralbach maintains that even the Rambam agrees that the Torah forbids making a loan that includes these terms since the provision for ribbis was included at the time that the money was given by the lender to the borrower. The Mabit disagrees and maintains that even according to the Ra’avad the ribbis prohibition is only rabbinic since in the initial – and possibly only – stage there is no interest. However, the terminology of the SA (177, 16) indicates that the opinion of the Ralbach is authoritative.
While all of the above applies in case the lender is not a tsedoko cause. However, in your situation, since the funds that you lent to your friend belong to your yeshiva and not to you personally, your agreement is permitted even if the loan is in dollars to repaid with dollars since, as we discussed in an earlier article, Rabbinic prohibitions of ribbis do not apply when the lender is a yeshiva. (This is ruled without any dispute in YD 160, 18.) It is very important that you structured your loan that your friend only obligated himself to pay a one-time fine since we saw that the authoritative opinion is that if the fine grows with time many maintain that the prohibition is from the Torah. Therefore, you must be careful to avoid structuring your loan in a manner that the fine will grow with time. However, what you did is permissible and if your friend does not pay on-time you may charge the fine and if you need to go to beis din to collect, beis din will force your friend to pay the fine.
