What is the difference between interest and rent. Why can’t the amount demanded for a loan given be classified as rent? After all you are using the money the way you use an item rented out to you.

If the nature of the transaction is such that the asset given for a period of time is to be ‘used’ by the receiver, but, by the nature of the transaction, cannot be ‘used up’ by him, the predetermined gain would be categorized as rent not interest.

Consider the hypothetical situation where Mr A leases out his house to Mr B for one year at a rent of Rs. 5000 per mensem. In the third month, Mr B is unable to pay the rent, and, in accordance with the terms of his contract, he has to vacate the premises. To do this, he does not have to ‘re-create’ the building as the nature of the whole arrangement was such that he could not ‘use up’ the property.

On the other hand, Mr A gives a sack of wheat to Mr C for a certain time period, during which Mr C has to pay Rs. 50 every week to Mr A over and above the value of wheat. Now, in the second week Mr C is unable to pay Rs. 50. In this case, he might have to ‘re-create’ the sack of wheat to return the loan as he might have consumed it, or ‘used it up’.

To use accounting terminology, one might say that interest is charged on circulating capital whereas Rent on fixed capital.

It is also important to note that it is the nature of the transaction, not the nature of the commodity, which determines whether the capital is circulating or fixed, that is whether it can or cannot be ‘used up’. For example, a machine hired to produce goods may be categorized as fixed capital as, by the nature of the transaction, it cannot be ‘used up’, whereas the same equipment borrowed as stock-in-trade for sale by a fellow trader may be categorized as circulating capital as, by the nature of the transaction, it may be ‘used up’ to generate revenue.

Consequently, one can say that in case of an interest bearing transaction:

i) there is a gain at a predetermined rate on the loan, and

ii) the nature of the transaction is such that the commodity borrowed can be ‘used up’ to generate revenue.

It is needles to say that money is a commodity which, by its nature, involves transactions in which the loaned capital sum may be ‘used up’ by the borrower. Therefore, whenever money is lent, any gain at a predetermined rate on the principal is interest.