If there is in fact no risk of Barry not paying, then Steve absolutely should go through with the loan. Currently the best checking and savings account rates are at 2% or less. Left in the bank at that rate his deposit of $1600 would net a profit of under $170 in five years, which is less than the $400 he would make on the loan. That is assuming that the interest rate stays the same, however the interest rates for most checking and savings accounts seems to have fluctuated between 1-3% at most and it seems very unlikely that it will ever rise above that level in the near future. Therefore I would rule out depositing the money in a basic checking with interest, or savings account as a way to make more money than he would on the loan.
The next option he might explore is investing his money in a five year CD. While the money is less liquid in the CD than it would be in a bank account, the interest rates are always much greater. Currently the best national rate I could find for a CD for an under $2,000 deposit was around 3.64% compounded annually. After five years this would equate to about $315 profit, which is definitely better than the money would do just sitting in a savings account. It still isn’t as much as the $400 he would make on the interest from the loan. However there are slightly higher rates available if he met higher initial deposit requirements (ranging from $5,000 - $10,000). In addition the rates have a much greater potential range of fluctuation. Although this may not matter for all CD accounts, as they are fixed at the initial rate for the duration. There are however many banks that offer you one or two total chances to “bump up” your rate if after a given period of time has passed, you wish to switch to the current rate instead of the one you initially locked in at. It was only a couple years ago that I took out a five year CD at 5.5% APY, and there accounts available at upwards of 6% APY for larger investments. While it’s unlikely that rates will reach that point within the next year or so, it’s probably not impossible that the rates could still recover enough within a five year period for it to be possible for his investment to make $400 or more. This would still be a gamble, as it’s also not out of the question for interest rates to instead stay the same or go down for the five year duration of the investment.
This is why I would have to advise Steve, that his safest move and best chance to do the most with his money is via making the loan to Barry. Although he should definitely make sure that he makes it a legally binding agreement, and has paperwork stating the terms drawn up and notarized before any money ever changes hands.