plus/minus epsilon

ISAs vs Income-Based Repayments

10 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:

  1. 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.
  2. 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.

Finance Income Share Agreements