If the title sounds ridiculous, please hear me out before downvoting.
Let's start simple. You have too much money on your hands and want to start a loan business.
If you neither want to gain nor lose the intrinsic value of your money through giving someone a loan, you would give them an interest rate equal to that of inflation. Let's say the inflation rate is at 2%/year.
If you're trying to run a business, you need to actually make money so you can pay the bills for your business. The solution is to give out loans with a higher interest rate, like an interest rate of 3%/year.
If you're trying to run a business, you need to also account for the risk that the principal will never be paid back, so maybe you bump that interest rate up to 4%.
So far so good? Let's sum it up. Here's the idea:
You loan $X to the debtor.
Debtor must legally pay you back 4% (breakdown above) of the remaining principal per year.
If debtor is allowed to pay less than the required 4% per year, then he's effectively borrowing more money that will accrue more interest, so that's equivalently just adding to his principal.
If the debtor pays more than the 4% per year, the difference subtracts from the principal similarly.
The debt is fully paid whenever the principal reaches zero. Could be now, could be in 100 years.
And if you want, you can set a legal deadline. But the mere deadline in the contract doesn't affect how much interest is paid—the interest is only affected by how much money is borrowed and how long has passed.
So my question is the following:
Why isn't the above the business model of a loan?
i.e.: Why do I need to deal with apparent nonsense like the following?
"Is it an 30-year loan or a 10-year loan?"
What does it even mean and what difference in the world does it make?
It doesn't even enter the picture I just showed above!
You should be able to pay back whenever; what's the point of an arbitrary timeline?
"If you pay extra, do you want the extra to go toward the interest or toward the principal?"
Again—what sense does this question even make? Like I showed above, you just owe whatever you owe so far—you can call it the interest or the principal or the frog.
It seems like the interest merely needs to be a function of how much you have borrowed and how long you have kept the money so far.
Why add more complications so that "should I call this principal or interest" actually makes a difference? Why's the point (incentive) for this?
To be explicitly clear, I am NOT asking what differences the extra parameters make in the current business models! I understand the mathematics just fine. I am asking why the business models are so complicated in the first place, when it seems (to me) that they only cause confusion and don't have any fundamental need to be that way, when something simple like the above seems just fine. Is there a legal reason? Is there a risk-management or other game-theoretic reason? Is it another practical reason I'm not considering? etc.