The Torah says that charging interest on a loan to a Jew is prohibited, but to an idol worshipper it is permitted. My question is why? I can think of three possible answers:

1) There is a time value of money, so one is permitted to charge an idol worshipper interest, but a Jew should be considered family - just as one would not charge his or her immediate family interest on a loan, he should not charge a fellow Jew interest. So there is nothing inherently wrong with charging interest.

2) There is no time value of money, so one is prohibited from charging a fellow Jew interest, since charging interest would be ripping off a fellow Jew. However, since it can be assumed that an idol worshipper will charge a Jew interest if he or she can, in order to put both parties on equal footing, the Torah allows a Jew to charge interest to an idol worshipper. So there is something inherently wrong with charging interest.

3) There is no true reason for this. The Torah says it is prohibited, so we must follow it.

Which is correct?