ISAs vs Income-Based Repayments10 Jan 2021
In my last post, I discussed Income Share Agreements (ISAs), including their many downsides and how they’re prone to being more expensive than traditional loans. In this post, I wanted to discuss something that I think is a much safer solution to the same problem: Income-Based Repayments (IBR) for a loan.
IBR loans are similar to ISAs in that the minimum payment is a percent of your income, but there are a few key differences:
- The agreement is still structured as a loan, which means interest accumulates over time rather than the borrower having to hit an arbitrary repayment cap. The faster the loan is repaid, the less interest expense there is.
- The expiry period of a loan is much longer than that of an ISA (25 years vs 5 years).
This solves the same problem that ISAs sought to solve by minimizing the likelihood that the loan becomes a financial hardship, in addition to not having edge cases that are unfair to the borrower. Loans also have many desirable features that an ISA doesn't such as allowing pre-payment, consolidation, and refinancing.
Finally, IBR loans consitute better investments than ISAs because having a fixed interest rate and a long expiry period makes the long-term returns more predictable, even if the short-term payouts are not.