A different approach to Loans
An interesting portion of the Islamic faith prohibits the use of interest on loans. Instead of attaching an interest rate to loans, Islamic banks charge their customers a set fee for borrowing money and set penalties if the borrower cannot pay back in time. Given the proper fee (say 100% of the initial loan for a 30 year mortgage), this seems to cost the borrower the same amount as charging an interest rate. However, I can see three potential benefits for the borrower. 1. The borrow is presented up front a definitive cost of the loan, instead of a vague interest rate. 2. The bank cannot arbitrarily change the interest rate, which could drastically alter the long term cost of the loan. 3. If the borrower is only able to muster a smaller payment than previously determined, the borrower is not stuck simply servicing the interest with no hope of paying off the actual loan.
