History of the interest free loan
3 July 2008
Interest free loan schemes in a purely financial sense (as in not designed to sell more of a store's products) do not really exist in much of modern finance, however there are exceptions both historically and today. Various religious bodies have had tough stances against the charging of interest on loans. This has led to many attempts at providing an interest free loan over the years.
The Medici family of Renaissance Italy engaged in money lending and managed to avoid Papal sanctions through complex bookkeeping that gave the appearance of providing an interest free loan. By including many other parties in the loan scheme, the Medici managed to profit in a similar way to charging interest, although in a much more convoluted manner.
Currently interest free loan plans are offered by Islamic banking institutions who cannot charge interest, yet understand the need for credit. Shariah Law forbids usury, so interest is entirely disallowed. Thus, the Islamic financial model involves shared risk between the customer and the financial institute. Various interest free loan-like financial products exist within the Islamic financial model, such as leasing agreements where the bank buys an item and then leases it back to the customer over time.
Essentially, even when a loan is interest free, there will always be a financial model designed to potentially profit by offering financial aid.
Recommended Personal & Car Loans
