Variable Rate Loans Vs. Income Share Agreements

One question we have gotten from applicants is, “How are income share agreement payments different than the variable rate option that XYZ company is offering me?”  The primary reason for the question is both options are similar with regards to repayment.  That is, both have payments that fluctuate.  However, therein lies the difference as well.

Variable rate loans have an introductory interest rate for a set period of time.  In other words, the interest rate and payment is set for a predetermined number of months.  Thereafter, the rate adjusts and so does the monthly payment.  The interest rate and monthly payment are determined on what is referred to as a benchmark.

Most of the time, this benchmark is determined by LIBOR or a U.S. Treasury bond.  In simple terms, your payments are determined by bankers and you have zero control or influence over when or how much your payment changes.  In fact, LIBOR actually stands for London Interbank Offering Rate.  If you’re asking yourself, “I live in America, what the @&#! does my payment have to do with a rate in London?” Don’t worry, you are not alone.  In a future article I’ll explain what LIBOR is and the reason why bankers use it, but that is for another day.  Most companies will offer variable rate loans that adjust once a year or every month.  If you decide to use a variable rate loan, make sure you read the fine print to make sure it fits your financial goals.

With an income share agreement, your payments will also fluctuate.  However, repayment is based as a percentage of your income.  Income, Income, Income….and while you cannot completely control your income, at least you can influence it.  Since income share agreement repayments are based on income, you have more control over your cash flow.  If your income goes down, your payment goes down, so you will not find yourself in a cash crunch.  If your income goes up, you know that your payments will go up as well, but at least you can anticipate it and most importantly, you can afford it. With a variable rate loan, you may be sailing along with lower payments, but you could easily find yourself opening up a payment notice stating that your loan payment will be doubling due to circumstances that have nothing to do with you.

I will summarize with an analogy.  Picture yourself sitting down with your little brother to watch sports on cable TV and he has the remote control.  Not only can you not control what games are being televised, you also cannot control when your little brother changes the channel to watch a cartoon.  This is similar to a variable rate loan (Yes, you can beat up your brother….but you can’t beat up your banker, and no…I’m not promoting violence).

An income share agreement is like you controlling the remote control instead of your little brother.  Although you do not control what games are televised on cable, you have influence over what games you watch.  Not only that, but you can also decide to switch to satellite or stream sports over the internet, which increases the degree of influence you have.  You no longer have to have your situation dictated to you….

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