Short answer
Interest (riba) is haram because Allah forbids it in the Quran and the Prophet ﷺ cursed everyone who takes part in it. It lets money earn money with no work, trade or shared risk, and it moves wealth from people in need to people who already have it. All four schools agree it is a major sin.
Riba is haram by the Quran, the Sunnah and the consensus of the scholars, and it is a major sin. Any increase a lender sets as a condition on a loan is riba, however small the rate.
The four schools agree on this.
Explanation
The Arabic word riba means increase. In a loan, it is any extra the lender requires on top of what he lent, whether the extra is 1% or 30%, a fixed charge or a rate. Interest on bank loans, credit card balances and payday loans all fall under it. For the full definition and the two types of riba, see What is riba in Islam.
The Quran is direct. Allah "has permitted trade and has forbidden interest" (2:275), and those who keep taking it after the warning are told of war from Allah and His Messenger (2:279). The Prophet ﷺ named consuming riba among the seven sins that destroy a person, and he cursed the one who takes it, the one who pays it, the one who writes it and the two witnesses.
A Muslim avoids riba because Allah forbade it, but the scholars also point to the wisdom behind the ban:
- No shared risk. In trade or partnership, the investor can lose. In an interest loan the lender's gain is fixed whatever happens to the borrower.
- It feeds on need. The people who borrow most are often the poorest, and interest makes them pay the most.
- Debt that grows. Interest compounds, the "doubled and multiplied" riba the Quran warns about (3:130), and traps families for years.
- Wealth should circulate. Islam moves money through trade, partnership, lending without return and charity, which Allah says He increases (2:276).
All four schools agree that riba is haram, in small amounts as in large ones, and with any lender. If you are already in an interest loan, read Is it haram to pay interest? for what to do next.
The evidence
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
The Quran draws the line between lawful trade and forbidden interest.
Quran, Surah Al-Baqara 2:279
فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍۢ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ﴿٢٧٩﴾
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged.
Those who refuse to give up riba are warned of war from Allah and His Messenger.
Quran, Surah Aal-i-Imraan 3:130
يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوا۟ ٱلرِّبَوٰٓا۟ أَضْعَٰفًۭا مُّضَٰعَفَةًۭ ۖ وَٱتَّقُوا۟ ٱللَّهَ لَعَلَّكُمْ تُفْلِحُونَ ﴿١٣٠﴾
O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.
It names compounding interest and forbids it.
Sahih al-Bukhari 2766
Sahih... وأكل الربا وأكل مال اليتيم والتولي يوم الزحف ...
"Avoid the seven destroyers: among them he listed consuming riba and consuming the wealth of an orphan."
Riba is among the gravest major sins.
Sahih Muslim 1598
Sahih... آكل الربا وموكله وكاتبه وشاهديه وقال هم سواء ...
"The Messenger of Allah cursed the one who consumes riba, the one who pays it, the one who records it and its two witnesses, and he said: they are all the same."
Everyone who knowingly takes part in a riba contract shares the sin.
Where the ruling is recorded
- al-Hidaya, Kitab al-Buyu', Bab al-Riba. Defines riba and the conditions that make an exchange or loan unlawful.
- Radd al-Muhtar (Ibn Abidin), Kitab al-Buyu', Bab al-Riba. Sets out the Hanafi definition of riba and the rule that a loan may not bring the lender a stipulated benefit.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.