The Torah prohibition of Ri'bitt (interest) forbids accepting or giving compensation for the time in which a person retained somebody else's money. The question arises as to whether this prohibition would apply to an interest-free loan given on condition that the borrower must pay a fee in addition to the amount borrowed if he pays after the stipulated date. Since the agreement entails additional payment for the extra time in which the borrower retained the lender's money, perhaps this, too, should constitute a violation of Ri'bitt.
Rabbi Moshe Halevi (Israel, 1961-2001), in his work Milveh Hashem (p. 94), wants to rule that such an arrangement does not violate the Torah prohibition of Ri'bitt. On the surface, the extra payment rendered in a case of delayed payment is looked upon by Halacha as a penalty, imposed upon the borrower as an incentive for him to repay on time, rather than as interest on the loan. Indeed, even if the borrower pays the debt a moment after the deadline has passed, he must pay the late-fee, and thus the fee semmingly is not rendered in exchange for the time in which the borrower's money was retained. It rather serves as an incentive for the borrower to pay the debt by the designated deadline.
Nevertheless, Rav Moshe Halevi Z"L writes, although no Torah violation is involved under such an arrangement, the Sages forbade imposing this kind of penalty, as it gives the appearance of Ri'bitt. Furthermore, people might abuse this technique as a means of circumventing the Ri'bitt prohibition. For these reasons, the Sages enacted a law forbidding charging late-fees on interest-free loans.
Similarly, as the Shulhan Aruch establishes in Yoreh Dei'a (177:17), a borrower may not give the lender as collateral an item valued higher than the loan and stipulate that the lender can keep the collateral if the loan is not paid by the designated date. This arrangement, too, could be misused as a technique to avoid the Ri'bitt prohibition, as lenders will simply take costly possessions of borrowers and keep them if the money is not repaid on time. Although no Torah violation is entailed under such an arrangement, the Sages nevertheless forbade this agreement out of concern that it may lead to widespread violation of the Ri'bitt prohibition.
Summary: It is forbidden by force of Rabbinic enactment for a person to give an interest-free loan on condition that the borrower will pay an additional fee if he repays the debt after the designated deadline. Similarly, the borrower may not give the lender collateral valued higher than the loan and stipulate that the lender can keep the collateral if the debt is not paid on time.
