Let’s finish discussing the mechanics of the heter iska and its practical ramifications and limitations. Previously we explained the first few points of the heter iska — the heter iska turns the loan into an investment the lender makes and the interest paid is really the profits produced by the investment or a settlement agreed upon (i.e., the interest rate).
It follows that the interest rate must be a reasonable assessment of profit that one can possibly make. To take a loan from another Jew with a very high interest rate via heter iska is problematic, because the lender is basically forcing the borrower to return more than he can earn, which in effect is ribbis. However, the standard interest rates that the bank charges most people are okay, because this is usually the profit one can earn with the money, either through rising property prices and rent, or by lending the money to non-Jews with interest.
The above limitation applies to the standard loan to buy an apartment or house, or if one already has preexisting profitable endeavors. However, if one has an opportunity to make a large profit on a deal, he may use the heter iska to borrow at higher-than-typical interest rates reflecting the potential profits.
The last of the four main points is: If the investment is not profitable, the borrower may swear to absolve himself of paying the settlement amount. (In certain cases, there is even room to avoid payments on the principle.)
Since the interest is in reality the profits earned, there is no reason to pay if there are no profits. In fact, to pay in absence of profits is essentially ribbis, because one is benefiting his lender. To resolve this problem, the heter iska gives the borrower the right to swear and verify that he or she did not profit from the borrowed money, absolving them of the obligation to pay.
It’s not enough that this clause exists; it’s necessary for the borrower to be aware of it to truly avoid ribbis. This condition sets the stage for the monthly payments to be an expression of profits earned, not something we’re forced to pay.
Based on the above, one may wonder, Why do we pay interest monthly on money borrowed? Aren’t there many months when we lost money? We’ll discuss this next week.
