Question :What is the halacha regarding forgiving interest in advanced?
Answer:In numerous places the Torah prohibits a Jew from borrowing, lending or being a party to a transaction that involves charging another Jew interest. The prohibition of ribit is a strange one. It applies only when both parties are Jewish, regardless of how rich or poor they may be. However, a Jew is permitted to borrow money from a non-Jew and pay interest to him on the loan, thereby enriching him; and a Jewish person is also permitted to lend money to a non-Jew who asks for a loan and collect interest from him, just as non-Jews are permitted to lend and borrow money to and from each other with interest.
With regarding to the subject of forgiving Interest in Advance, It is forbidden to take a loan in order to pay back interest as a gift even though it is a willing and intentional gift.
The Geonim cited by the Rambam in hilchos Malveh Vloveh 4:13 he argues that obviously it is forbidden to give interest as even though one forgives it knowingly because that is every case of interest and yet it is forbidden. The Maggid Mishna over there points out that the Rambam agrees with the Geonim on this contention. The Rosh b”m 5:2 agrees to this as well. The Shulchan Aruch in Yoreh Deah goes further in siman 161:6 and codifies this opinion lehalacha.
Yet, the Mishna Lemelech 4:13 writes that it is permitted to forgive paying the interest in advance for rabbinic loans and that is permitted. His proof is that the Gemora in Bava Metsia daf 75a and the Rambam 4:9 permit rabbis to lend with interest since it is understood to be a complete gift and the Maggid Mishna says that it isn’t stipulated interest but interest after the fact. However, the Shach in siman 160:6 rules based on the Tur that it is forbidden to give interest even as a gift even if it isn’t stipulated in advance. It is ineffective and forbidden to arrange in advance that someone will pay you interest and then forgive the interest so that it shouldn’t need to be returned.
Taking Interest Temporarily
It is forbidden to take interest even if one will return it afterwards. Some say that this is only a rabbinic prohibition.
It is permitted to stipulate that the lender will benefit from the borrower’s property if they stipulate that he will pay a fair price or deduct that amount he benefited from the loan that the lender will have to repay. This is permitted since the lender will never be taking interest, rather he is deducting the benefit before he collects all of the capital. The Tur and the Shulchan Aruch in Yoreh Deah in siman 174:5 and See the Taz in siman 174:5 who poses this as a dispute between the Nemukei Yosef and the Tur and in the end he is lenient.
Taking a Loan only to Benefit the Lender
If someone takes a loan only for the benefit of the lender it is permitted for the borrower to let the lender benefit from the borrower’s property. For example, if someone doesn’t need a house and does a favor to the poor contractor and instructs him to build it and he’ll be paid for his expenses. Additionally the contractor can live in the house afterwards for free. That is considered permitted even though the lender is benefiting from the lender’s property since it isn’t considered a loan at all but a nice deed of the borrower.
Some poskim allow someone who wants to benefit a poor person or a talmid chacham to take a loan for him on interest. If that borrower makes money he needs to pay it entirely to the lender. Since he is doing it as a favor to the lender it isn’t interest. However The Bris Yehuda 2:20. And the Chelkas Binyamin siman 166:3 in biurim s.v. mi takes another approach based on the Levush that limits the Rama’s leniency to where no money of the borrower enters the hands of the lender.