Charging interest on a loan is fair and reasonable. The borrower knowingly accepts this fee in exchange for the temporary use of the money, thereby compensating the creditor for the “inactivity” of his money while it is on loan. That is why the Torah permits collecting interest from a gentile (though we are repeatedly commanded to lend money to our fellow Jews free of interest). The Rambam writes, however, that not only is it permitted to lend to a non‑Jew with interest, it is actually a positive mitzvah to collect interest on loans to an idolater.
Why?
The Baal Shem Tov taught that the money G‑d places in a Jew’s possession contains “sparks of holiness” that relate specifically to his soul and therefore depend on him for their elevation. Since money has the natural potential to generate more money when it is loaned, it follows that the permissible interest your money generates is related to your soul just as the principle is. Thus the Torah’s directive to know G‑d “in all your ways,” meaning to utilize every aspect of your life to come closer to G‑d, also applies to the potential interest that your money can generate.
Therefore, when lending to an idolater, from whom it is permissible to collect interest, collecting the justly earned interest is actually a mitzvah. For his requirement for a loan indicates that the interest he will owe on it is money whose elevation depends on the lender, who will extract it and reveal its Divine purpose to the best of his ability.
—Likkutei Sichos, vol. 12, pp. 118–119
Nevertheless, the Torah obligates us to lend money to our fellow Jews free of interest. In this instance, the potential interest is elevated in the opposite fashion—by the lender refraining from collecting it, like other prohibited objects that are elevated through our restraint.
