Matter of Interest
About 10 years ago, before I became religious, I borrowed a significant amount of money with interest from a Jewish acquaintance. Now that the loan is due I'm prepared to pay back the loan, but the person demands I pay the interest too; otherwise he'll sue me. If he takes me to court I'll certainly lose, in addition to incurring all types of expenses and losing time from work – not to mention the anguish of going through the ordeal of a court case. Since I'll end up paying more than the actual interest anyway, would it be permitted to pay it to the guy and good riddance? And since he's not religious anyway, do I have to be concerned about his taking the interest?
This is a question of great interest! Although I intend to offer you an interesting solution, since the laws of interest are very complicated, you may only accept my words as a suggestion. For a definitive answer, you must consult a local expert who can work through all the details with you in person.
First of all, you are correct that a Jew may not collect interest on a loan to another Jew. This applies even if the person is not observant since the Torah Law applies to all Jews. However, even if you would agree to pay him for the reasons you describe, you are not allowed to since the prohibition of interest applies not only to the lender's collecting, but also to the borrower's paying it.
It's for this reason that when asked a similar question, one of the great experts on these matters, Rabbi Ya'akov Bloi, zatzal, answered that a person would have to subject himself to being sued rather than paying forbidden interest of his own volition. However, in one particular instance regarding a long-term loan, when pressed by a ba'al teshuva who wouldn't accept this solution, the rabbi referred him to another great scholar, Rabbi Israel Fischer, zatzal.
When Rabbi Fischer heard the question, in his typically gruff manner he replied something like, "Those transgressors! You can pay him if you want to".
The person couldn't believe what he heard. He replied, "Excuse me rabbi, I'm just a ba'al teshuva and may not understand properly. But even if the lender is not religious, he can't collect interest; and I don't see how I can pay him interest even if I want to".
Rabbi Fischer replied, "Your being a ba'al teshuva is exactly the point! You say the loan was made 10 years ago before you became religious. Since then, there has been a shemita Sabbatical year which nullifies all loans. And as a non-religious person, the lender certainly made no prosbul agreement which would enable the extension of the loan beyond shemita. So he's a transgressor by trying to claim a non-existent loan! On the other hand, since there's no loan, there's no interest either, and you can give him as much as you want in order to avoid being sued!"