Interest (vaḍḍhi) is a sum of money paid for the use of another amount of money called the principal. The charging of interest is forbidden in the Bible and was illegal under secular and religious law in the Christian world until the 17th century.
It is still forbidden under Islamic law. Brahmanism also considered it to be an evil.
The Buddha had nothing to say on the matter of money lending but since the earliest times the Buddhist tradition has never considered it to be wrong as such.
The Buddhist thinking is that if it is legitimate to hire out one’s ox, one’s skills or one’s house, it should likewise be legitimate to hire out one’s money.
Money lending makes capital available to those who might otherwise not have access to it and it allows people to increase their savings.
Money lending only becomes ethically problematic when the interest charged is exorbitant, when the rate of interest demanded increases according to the lender’s desperation or when recovering a debt leaves the debtor in penury. During the Buddha’s time a person’s children could be seized in lieu of interest he or she owed (Thi.444). Today, laws protect debtors from such abuses.
However, while the Buddha had no objections to lending money on interest he was well aware that being in debt (iṇa) is an unenviable state. He commented that one of the advantages of being a homeless monk was that he did not have ‘creditors who call at dawn and demand “Pay up! Pay up!”’ (S.I,171).
He stipulated that a debtor cannot become a monk or nun, mainly so that people would not use the monastic Saṅgha as a refuge from their financial responsibilities (Vin.I,76). But if being in debt is a source of anxiety and worry, so is not having money when one needs it.
The way to avoid both these problems is to husband one’s finances with prudence and to maintain a balanced lifestyle (samaṃ jīvikaṃ) Today, many people go into debt, not to provide for their basic needs, but just so they can have fashionable non-essentials or so they can have the things they want immediately rather than wait until they have enough to purchase them. The Buddha said: ‘And what is a balanced lifestyle?
One knows both one’s income and expenditure and lives neither extravagantly nor miserly, knowing that income after expenditure will stand at so much and that expenditure will not exceed income.’ (A.IV,282).
But beyond this, some people will be moved to borrow money for some entrepreneurial endeavour in the hope of improving their present position, even though it may already be perfectly adequate and secure.
If this is done with careful forethought and hard work and the enterprise is ethically sound, it is, from the Buddhist perspective, legitimate and can be a source of enhanced satisfaction and happiness.
The Buddha said: ‘A man who had taken out a loan to develop his business and whose business had then prospered, might pay off his debt and then have enough left over to be able to get married.
He might think: “Before, I was in debt, but now I am free from debt and even have some left over” and then he would rejoice and feel glad.’ (D.I,71). One way a small businessman creates confidence and, therefore, can easily borrow money when he needs it, the Buddha said, is if he is punctual in paying interest (A.I,117). See Ambition and Aspiration and Livelihood.