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Islam strongly recommend to its followers to live within their own means manage their finances wisely and not be extravagant in spending. Asking for a loan without necessity is reprehensible (makruh). “Beware of debt for it causes anxiety at nighttime and humiliation at daytime.”
If you give a loan without the condition of interest, then it is known as al-qarzu ‘1-hasan (a good loan; an interest¬ free loan) and is considered a very good deed in Islam. Many ahadith say that the reward for giving charity is multiplied ten times whereas the reward for giving an interest free loan is multiplied eighteen times.


Giving such a loan is considered like giving a loan to Almighty Allah who is going to pay it back with compounded interest: “Who will give a good loan to Allah so that He will multiply it for him manifold? Allah straitens and increases (the sustenance), and to Him you shall return.” (2:245)
Giving loan in Islam has its recommended standpoints but paramount is the security of the loan. In other words the loan must be clearly stated it is a loan, and must be written down as such. Almighty Allah admonish:“And if you are in a journey and you do not find a scribe, then (there may be) a security taken into possession (by the creditor).However, if one of you trusts another, then he who is trusted should deliver his trust, and let him be careful (of his duty towards) Allah, his Lord; and do not conceal testimony, and whosoever conceals it, his heart is surely sinful. And Allah knows what you do.” (2:283).


Furthermore, a good loan has to be repaid as per the condition agreed between the creditor and the debtor. In other words it is the right of the creditor to demand back the loan that he documented and do not make him run around and not tarry [in repayment], because the Messenger of Allah has said, “Tarrying of the rich is injustice.”


Another stand point is the flexibility in re-payment. Zaynu ‘1-‘Abidin (a.s) wrote: “And if you (debtor) is facing hard times then you should please him (creditor) by amiable talk and kindly request him to allow an extension of time so that he returns from you content; and do not make him suffer bad dealings in addition to the loss of money because that is meanness. To the creditor, Almighty Allah says, “And if (the debtor) is in straitens, then let there be postponement (of the payment) until he is in ease. However (in such a case), letting it go as charity is better for you, if you know.”
(2:280)
However, there is a misconception among some Muslims that “al¬ qarzu ‘1-hasan” means that the debtor does not have to pay it back and that the creditor should consider it as “a bad debt”. This is absolutely a wrong notion. In some narration, it is recommended for the debtor to pay something more to the creditor who has given the interest-free loan rather than not wanting to pay back the loan.

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A story is told in hadith of a Muslim who died in Medina and the Prophet was requested to lead the funeral prayer for him. When the Prophet found that the deceased had left a debt of two dinars, he politely declined and instead asked his companions to say the funeral prayer until some of his relatives agreed to pay off the debt on his behalf.
This is instructive and for us to learn a lesson to pay the debts back to one another and not to take the debts lightly. What a debtor does not have to pay back is known as charity, not a loan…
May Allah free us from our debts.

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