Prodigy Finance Education loan

For some reason, Prodigy Finance shows 2 percentage figures on their quotation: estimated interest rate and APR, they mentioned the APR is the final interest rate after adding the US LIBOR and processing fee. LIBOR is the average interest rate of all the foreign lenders and NBFCs present globally and varies dynamically with sudden changes in the financial markets and banking sectors.

Now, many of you might not know that the Indian equivalent of LIBOR is MCLR (Marginal Cost of funds Lending Rate- MCLR refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI). So how would it sound if I say SBI’s interest rate is 2.5% plus MCLR? Does it ever mean that you are going to be charged interest at 2.5%? 

So, you have to compare Apple to Apple, and hence, Prodigy’s APR is what you have to compare with an Indian bank's rate of interest, not the misleading figure of “Prodigy’s Estimated interest rate”.

Let's analyze the differences in interest rates between loans from Indian banks and foreign lenders: 

• International lenders :

APR(annual percentage rate/ total interest rate) = LIBOR + Estimated interest rate + other costs

Let's consider a scenario where LIBOR is 2.8% (general LIBOR rate) and the interest rate paid to the bank is 7%, in addition to that we'll have some additional interest rate over other expenses for which we're taking a loan from the bank. Then the overall interest rate is :

APR = 2.8%+7%+X%=10%

• Indian banks :

Final interest rate = MCLR(marginal cost of fund lending rate) + Interest rate - discounts 

Let's consider a scenario where MCLR is 2.25% (general MCLR rate) and the interest rate paid to the bank is 8.55%, in addition to that we'll have some additional interest rate over other expenses for which we're taking a loan from a bank. Then the overall interest rate is :

Final interest rate in SBI = 2.25% + 8.55% - 0.5% = 10.3%  

Final interest rate in SBI for girls = Final interest rate in SBI - 0.5% = 10.3% - 0.5% = 9.8% 

Now, the most important thing is "How is LIBOR changing or expected to change?". Prodigy's interest rate is low because LIBOR is at its lowest point in the last 10 years and is expected to increase significantly. LIBOR grows at a faster rate when compared to MCLR, as MCLR grows at a constant rate.  

The processing fee of Prodigy Finance is 2.5% to 5% USD of the loan amount.

• Let’s consider a scenario where a student is moving to the USA and needs a loan amount of 50L rupees, then his processing fee via international lenders would be around 1.25L to 2.5L, whereas other indian lenders charge about 0-10k rupees, even if you include all other charges, it doesn't go beyond 25k. 
• Indian NBFCs charge a processing fee of about 1% of the loan amount i.e. 50k for 50L amount.  

Therefore, it is quite clear that processing fees charged by Prodigy Finance education loan are way higher than any Indian lender as it is calculated in USD and not INR.

The Annual Percentage Rate (APR) or effective interest rate for Prodigy Finance Education Loan is floating, it depends on factors like 

• LIBOR (London Interbank Offered Rate) values
• Interest rate decided by Prodigy and
• Other costs.

LIBOR is the average interest rate of all the foreign lenders and NBFCs present globally and varies dynamically with sudden changes in the financial markets and banking sectors. The value of LIBOR has increased significantly from 2.95 to 5.72 in the first quarter of 2023 and is expected to rise further owing to the market recovery after Covid19 pandemic.

Therefore, interest rates charged by Prodigy Finance cannot be kept fixed. This is one of the major issues in taking an education loan from Prodigy Finance. So, consider this point before choosing your education loan lender.

Indian currency INR is continuously depreciating at a rate of 4.7% per annum, so it becomes easy for students to pay back the loan in INR when they're earning in USD. 

• Prodigy Finance has a policy that they disburse the loan amount semester-wise, which means an installment of disbursement from the total loan amount will get credited before the start of every semester. The catch here is that loan installment will only get disbursed if the student has performed well in the previous semester as per their loan conditions.
• Moreover, the entire loan amount including tuition fees and loans for other expenses is disbursed only to the college or university’s bank account and then students will have to take the loan amount from the college or university. This extra step makes the process lengthy and increases the dependency on college for funds.

Many of you forget the benefits you get as an Indian national when you take a loan from an Indian bank. Under section 80E you can claim an exemption on the interest component of your loan. This means you can:

• Save 30% of your interest if your or your co-applicant's income is above 10 lacs, making your effective rate of interest, 6.33% (female students) and 6.68% (male students)
• Save 20% of your interest if your or your co-applicant’s income is between 5-10 lacs, making your effective rate of interest, 7.24% (female students) and 7.64% (male students)
• Save 10% of your interest if your or your co-applicant’s income is below 5 lacs, making your effective rate of interest 8.14%, (female students) and 8.6% (male students)

In addition, for minority communities, under the Padho Pardes scheme, Govt of India pays your interest for the moratorium period if you take a loan from a nationalized bank in India. A similar scheme exists for SC/ ST students called Dr. Ambedakar's interest subsidy scheme.

Note: Padho pardesh has been discontinued as of April 1st, 2022, But the current beneficiaries as of 31st March will continue to receive the interest subsidy throughout their term. 

Prodigy Finance cannot give you these benefits and hence an interest rate of 10% will be effectively 10% only not less than that. And as Prodigy Finance is registered in the UK, you cannot even get the benefit of building a Credit score in the US.

• This is the toughest to explain, but the most important to understand. If you get it, you will realize 10% Rate of interest from a US lender is equivalent to 15% ROI from an Indian lender.
• Let’s take a hypothetical case of a student who went to study in the US in 2011 (We considered the year 2011 as we have past data to prove the point). He took a loan in July 2011 (1 USD = 44 INR) of INR 44 lakhs ($100K). His course finished in July 2013 and in Jan 2014 he started repaying the loan.
• Now in Jan 2014, 1 USD was equal to 62 INR and in the next 3 yrs, which the student took to repay the loan, 1 USD went to 69 INR in Dec 2016. If we consider the average USD-INR conversion for the period Jan 2014 to Dec 2016, it was 1 USD = 65 INR.
• Let’s assume the student took complete INR 44 lakhs in July 2011 which was $100K, at a 10% interest rate, by Jan 2014, the total repayable is INR 55 lakhs (principal plus 2.5 yrs simple interest) but at the rate 1 USD = 65 INR, the student was able to pay back INR 55 lakhs with only $84,615.
• This is the benefit of borrowing in a cheaper currency, you borrow $100K and you return less than $85K.
• Now, if this student had borrowed the same $100K from a US lender at a 10% interest rate, his repayable in Jan 2014 would have been $125K (principal plus 2.5 yrs simple interest). So, now you see the difference between both Indian banks and US lenders charging a 10% interest rate, still, the student pays back $85K to the Indian bank or $125K to the US lender. 
• That’s why we start this point by saying a 10% loan in USD is equal to a 15% interest rate in an Indian bank (after considering the FOREX deductions of 1% both ways). And wait, the worst will happen to you if, by any chance you come back to India while you are still repaying your USD loan, you are GONE. You will be earning in a depreciating currency and hence, you will end up repaying double the amount you borrowed.

Check out the USD to INR Education Loan Calculator to get more clarity about the interest rate parity calculation.

• Prodigy Finance can fund up to 100% of the total cost of attendance (i.e. tuition fee, living expenses, and other costs) but that’s not what the stats look like. The average funding by Prodigy Finance is 65% of your total cost. Doesn’t sound that bad. Right? Because in most cases, a student barely needs 70% of their on-paper cost (i.e. I-20 amount).
• But the catch here is if you take a loan from Prodigy Finance, the loan margin i.e the remaining 35% (e.g. INR 17.5 lakhs, if your total cost of attendance is INR 50 lakhs), has to be shown in the form of proof of funds, before the loan agreement for the first year. The same procedure has to be followed for every year. This can be a burden for students/parents to arrange the entire remaining amount. Contrarily, Indian NBFCs fund you 100% of the tuition, living, travel, and misc expenses without the loan margin concept.
• To add on, Prodigy Finance doesn’t approve your loan for the second year of your education if you are not showing the whole margin for 2nd year in your account.

• Moreover, another drawback is that Prodigy Finance is regulated by the UK Financial Conduct Authority, which means loans are regulated by English laws and the government of India does not have any authority to resolve any financial dispute if it arises before loan sanctioning or at the time of loan repayment.
• On the other hand, if you take a loan from unsecured education loan lenders in India then you will be assured of the lender's credibility as all Indian lenders are regulated and monitored by the Reserve Bank of India.
• The average education loan amount which students take to study abroad is around Rs 40 lacs including tuition fees and other expenses. It is a big amount for many and therefore, we recommend you not take a risk and prefer only Indian lenders to take education loans.