But wouldn't it be even better if the farmer bought the tractor on a loan? Now the farmer keeps the entirety of his production and the guy that would have rented the tractor also has to work, further improving society.

The farmer is either renting the tractor or renting the money to buy the tractor. Which is better depends on details like the rate of the loan/rental and the expected utilization of the tractor.

How is that different. In either case the farmer is paying someone (interest/rent) more for the use of the tractor than just outright buying it (which he does not have the capital to do).

Where does the interest go

To the person that made the loan, to compensate them for the risk they took. No need for anyone to profit from the work of another forever.

That's the decision to be made by the farmer either selling equity or taking a loan.

From the perspective of the banker/lender, they're still living off someone else's labor (which is fine for me since it's the result of a voluntary exchange for something else of value, but it seems like it's not for some upthread posters).

So it's ok to rent out money but not rent out tractors?

Communists will say this is still rent seeking and the tractor should be seized and given to the farmer.

Good luck keeping the guy who builds the tractors motivated.