A:
The example mentioned in the question is a form of Riba (usury), because it is an interest-based loan, which is outright Riba.
Allah (Glorified be He) has forbidden Riba, and threatened the usurer with severe punishment. Allah's Messenger (peace be upon him) also cursed the consumer of Riba (i.e., the usurer), the person who borrows the loan on interest, those who witness usury, and the person writing down the bond of usury. So, the person who borrowed the loan mentioned in the question is required to pay off to the lender the exact loan without any increase, so that he does not help the lender to consume Riba and consequently become his partner in such sin. He is also to advise the lender to repent to Allah (Exalted be He) for consuming Riba, not to do this sinful act any more, and to accept his capital sum without interest. The lender should also fear Allah, his Lord, and avoid committing what Allah (Exalted be He) and His Messenger (peace be upon him) have forbidden. Allah (Exalted be He) says:
...but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).
And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay
(Part No. 11; Page No. 120) May Allah grant us success. May peace and blessings be upon our Prophet Muhammad, his family, and Companions.
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