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New post 30 Apr 2018, 11:06
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Prodigy Finance is a trending finance option in 2018 among Indian students looking to study abroad. It was submissively serving Indian study aspirants over the last few years until they got this massive funding of $240 million in August 2017 and that’s made this community lender take this big leap to transform into a commercial lender.

So, when I say commercial lender, I stress on two things. One, they went from supporting a niche list of top schools to more than 300 schools by massively increasing their list, which is good for all of us and good for Prodigy Finance because now they tap a bigger market. And second, they increased their interest rate from an average APR of 7.5% to an average of 10% (for Indians), to mitigate their risk because now they fund much lower ranked schools than earlier.

Prodigy Finance has its advantages such as hassle-free online process with no co-applicant and no collateral required. But recently, when the trend started shifting towards US lenders portraying themselves as a better option over the Indian Public Banks, I thought of bringing a deeper insight than what looks better on the surface.

In this article, I will be comparing the lenders based on 5 major parameters:
  • Interest rate
  • Income Tax exemptions
  • Processing Fee
  • Loan Margin
  • Interest rate parity

Interest rate

For some reason, Prodigy Finance shows 2 percentage figures on their quotation: estimated interest rate and APR (which nobody understands and hence they had to make this video to explain it). In the video, they mentioned the APR is the final interest rate after adding the US Libor and processing fee.

Now, many of you might not know that Indian equivalent of LIBOR is MCLR (Marginal Cost of funds based 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 Indian banks rate of interest, not the misleading figure of “Prodigy’s Estimated interest rate”.

So, Prodigy’s average APR is 10% and Indian banks average interest for prime universities (all schools supported by Prodigy are in the Prime list of Indian banks) is 9.4% for Males and 8.9% for Females (inclusive of MCLR and processing charges).

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 last 10 yrs and is expected to increase significantly. Below is the last 4 years trend of USD LIBOR and as you can see, it increased approx. 5 times from 0.5% to 2.3% now.

LIBOR is forecasted to increase from an average of 2.2% right now (Mar 2018) to 4.2% in 2 yrs (Mar 2020) which means an obvious 2% increase in your interest rate with Prodigy Finance.

Income Tax exemptions

Many of you forget the benefits you get as Indian nationals 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 you or your co-applicant’s income is above 10 lacs, making your effective rate of interest as 6.33% (female students) and 6.68% (male students)
  • Save 20% of your interest if you or your co-applicant’s income is between 5-10 lacs, making your effective rate of interest as 7.24% (female students) and 7.64% (male students)
  • Save 10% of your interest if you or your co-applicant’s income is below 5 lacs, making your effective rate of interest as 8.14% (female students) and 8.6% (male students)
  • This is the most common reason why students or parents who have done their homework properly by comparing foreign lenders and Indian banks, decide to go with Indian Banks. In addition, for minority communities, under Padho Pardes scheme, Govt of India pays your interest of moratorium period if you take the loan from a nationalized bank in India. And a similar scheme exists for SC/ ST students called Dr. Ambedakar interest subsidy scheme.

Prodigy Finance cannot give you these benefits and hence an interest rate of 10% will be effectively 10% only not lesser 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.

Processing Fee

You may not realize how humongous is the processing fee of Prodigy Finance because you don’t pay it up front and it gets added to your loan and eventually you end up paying interest on your processing fee as well.

The processing fee of Prodigy Finance is 2.5% of the loan amount i.e for an average loan for US of INR 40 lacs, your processing fee will be INR 1 lac. Whereas Indian banks charge a processing fee between zero (nil) to INR 10K max plus property legal opinion and valuation charges of INR 7K for a loan amount of up to 1.5 Cr.

Loan Margin

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 his on-paper cost (i.e. I-20 amount).

But the catch here 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.

On the other hand, Indian public banks can also fund you up to 100% of the total cost of attendance. But if it doesn’t happen (varies from bank to bank), let’s say they could only fund you 65% due to collateral value, the remaining 35% is not to be shown immediately. The margin in Indian banks is to be brought on Pro-rata basis only i.e. if your margin is 35% on an INR 50 lakhs loan, and if your first payment is only INR 10 lakhs, you need to bring in only INR 3.5 lakhs (35% of only INR 10 lakhs, not the entire 50 lakhs).

To add on, Prodigy Finance DOES NOT approve your loan for the second year of your education if you are not showing the whole margin for 2nd yr in your account.

Interest rate parity

This is the toughest to explain, but the most important. If you get it, you will realize 10% Rate of interest from a US lender is equivalent to 15% ROI from an Indian lender.

If you google Interest Rate Parity, you get this- “it is a theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate”. I know it is full of jargon, in layman terms it means that you cannot simply compare the interest rate number of 2 loans which are in different currencies, there is modeling involved to drive how much interest rate of a USD loan is equal to Indian loan or vice-versa.

I won’t go into modeling, but I’ll explain through an example!

Let’s take a hypothetical case of a student who went to study in the US in 2011 (I considered 2011 as I’ll have past data to prove the point). He took the loan in July 2011 (1 USD = 44 INR) of INR 44 lakhs ($100K). His course got over 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 10% interest rate, by Jan 2014, total repayable is INR 55 lakhs (principal plus 2.5 yrs simple interest) but at the rate 1 USD = 65 INR, student was able to pay back INR 55 lakhs with only $84,615. See the MAGIC, you borrow $100K and you return less than $85K. This is the influence of borrowing in a cheaper currency.

Now, if this student would have borrowed same $100K from a US lender at 10% interest rate, his repayable in Jan 2014 will be $125K (principal plus 2.5 yrs simple interest). So, now you see the difference both Indian bank and US lender is charging 10% interest rate, still, the student pays back $85K to Indian bank or $125K to the US lender. That’s why I start this point by saying a 10% loan in USD is equal to 15% interest rate in 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 of the amount you borrowed.
All the USD-INR conversion data are real figures from XE currency chart for last 10 yrs. (below shown is a screenshot)

INR had an average depreciation of 4.7% over the last decade and according to NDTV Profit, it is expected to continue at the same annual rate over the next decade. And hence if repeat the above calculation in 2024 for you as a student who went to study in 2018, I’ll still get the same result.


  • If you have a collateral, you will be a fool to go for a US lender thinking “No collateral required” and ending up paying $60K extra considering processing fee, losing the income tax exemption and interest rate parity. If you feel bad about putting collateral as it is your parents’ hard-earned asset, why don’t you think about gifting that saved $60K to your parents instead of giving it to a lender? Your house will be there for next 10 yrs, your parents will be staying in there, the only loss will be of that $60K which you paid the lender.
  • If you DO NOT have a collateral, try for Indian unsecured loan providers- NBFCs. Compare the interest rate of them with the US lender, only if the US lender is offering you 5% (or more) cheaper than Indian NBFCs, then go for US lender, else Indian lender will be better for you. You may repeat the maths considering processing fee, income tax exemption and interest rate parity for your case to analyze how better is the Indian NBFC.
  • If you DO NOT have a collateral and an acceptable co-applicant, you will be rejected by Indian NBFCs. US lender is a good option and the only option in that case. So, choose them only after running out of all your options in India.

Busting the marketing jargon-

No offense, but the Prodigy Finance team usually mention the below points in its defense. Let me clarify that as well:
  • “Putting up collateral is a big thing”- Agreed. But is it that big deal that you end up paying extra $60K as a compensation for not putting your collateral? Ask yourself!
  • “Documents/paperwork is still a big hassle”- Agreed. Prodigy Finance offers a really simple process which is completely online. Whereas, you must be thinking it takes multiple bank visits and longer processing time if you go via a nationalized bank in India. But, not anymore. The days have changed. WeMakeScholars initiative has eased the process with the nationalized banks by introducing documents pick-up, quicken the processing and brought down the total sanctioning time to 14-16 days. Also, remember it is one-time in life and leading to a saving of approx $10K a year for 6 yrs until you repay. So, can’t you afford to spend that time and effort?
  • “You’d be ideally working in the US”- So what? As mentioned in the interest parity point, If you are earning in USD and repaying an INR loan, you save a huge amount.
  • “You lose money on FOREX conversions- 1% each way”- True. But that 2% (to and fro) on the loan amount used is still lower than 2.5% processing fee on total loan sanctioned (Indian banks processing fee varies between INR 0 (nil) to INR 10,000)

Please note that the Original article was published by the author and is available at ... s-reality/



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New post 01 May 2018, 22:39
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Nice Article Stone! Very well written.

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New post 02 May 2018, 02:45
stonecold, Good One especially for Indian Students :-)

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Debunking the myths about your Prodigy Finance loan

Prodigy Finance launched in 2007, providing loans to international MBA candidates at INSEAD. Funds were crowdsourced from alumni, financial institutions and socially-aware investors to support students who often experience difficulties securing sufficient educational loans in their home or host countries.

Every year brings more international students, and lenders are responding to these needs where possible.

Prodigy Finance has grown too.

From INSEAD, the list of supported schools has grown tremendously over the past decade. Currently, Prodigy Finance supports international grad students attending more than 300 programmes across 18 countries.

With growth comes some misconceptions. This article will help you understand the truth about your Prodigy Finance loan.

1. Prodigy Finance’s forward-looking model: how we calculate your interest rate

One of the key differences between traditional lenders and Prodigy Finance is the model used for underwriting risk on loan products.

Traditional banks work only with historic and current financial data when assessing borrowers. While the data banks consider varies between countries and banks, it’s safe to say that they don’t consider future salary increases post graduation when extending loans to masters students - whether they’re studying domestically or internationally.

Prodigy Finance’s Future Earnings Potential model, on the other hand, uses additional data to determine the risk and maximum amount a student is eligible to borrow. Working with a growing number of students and schools over the years has enabled us to continually refine our dataset. This, along with increased funding sources has enabled larger loans with reduced interest rates.

2. Variable interest rates, LIBOR, APR, and comparing apples to apples

Different loans and lenders use different methods to determine the interest due. Broadly speaking, there are two types of interest:

    Fixed interest - this is a flat rate. The interest rate you pay won’t change over time; if it’s 10%, it’s always 10% until you’ve repaid your loan in full.
    Variable interest - this interest changes over time, taking into account various market factors.

Prodigy Finance uses a variable interest rate model, as do many educational loan providers throughout the world.

When discussing variable interest rates, it’s important to note that there are always two different parts that form the interest rate:

    Base rate - this is the variable portion. Examples of base rates include Prime, London Interbank Offered Rate (LIBOR), and Marginal Cost of funds based Lending Rate (MCLR). Base rates have different methods of calculation, but all take into account broad market factors in the country or countries where they’re used.
    Fixed margin - this is a borrower’s personal risk rate - and always floats on top of the base rate for any variable interest loan. The same is true in India as it is in the USA as it is in Japan as it is in Brazil. The fixed margin is calculated using your personal past financial data (and, in the case of Prodigy Finance, Future Earnings Potential).

If you have a variable interest loan, these two components will always be there, whether they’re explicitly called out or not. At Prodigy Finance, we believe that complete transparency better equips potential borrowers to make responsible financial decisions and will always provide you your fixed margin rate as well as the base rate used.

LIBOR rates and Prodigy Finance

One thing all base rates have in common is that they’re variable. It’s as true for MCLR as it is for Euribor. These rates change according to market factors. They’ll all rise and drop over the course of any loan period.

Prodigy Finance uses the 3-month LIBOR, Euribor, or US LIBOR as the base rate for loans. The applicable rate is dependent on the currency of your loan.

For example, if you secure a Prodigy Finance loan to study in the United States, US dollars is the currency of your loan and the corresponding base rate is US LIBOR.

One reason for choosing LIBOR or Euribor is the transparency of these base rates. Not only are the calculations available, but the rate and all changes are public; you can check LIBOR and Euribor at any time.

APR and your Prodigy Finance loan

Annual percentage rate (APR) is a standardised method of assessing and comparing loan products. It includes the interest rate (which, if it is a variable interest rate, will include both the fixed margin and the base rate - whether it’s Prime, LIBOR, MCLR, or another base) as well as any fees associated with a loan.

Providing interest rates separately from fees makes it too difficult for most borrowers to see the full cost of their loan which is why APR is used.

While APR calculations aren’t used in every country, anyone who plans to study and perhaps live in the US or UK should definitely take a moment to understand APR as it’s legally mandated in these countries as it provides a more-complete picture of your loan costs.

In the case of Prodigy Finance loans, APR includes the interest rate (fixed margin plus base rate) plus the admin fee.

If you have the APR of two loan products with the same currency, you can use it to compare them directly. That’s not possible when comparing interest rates (as you won’t get the impact of the fees associated with your loan). You also cannot compare interest rates to APR.

See our APR explanation on Youtube

3. Income tax exemptions and repayments

Prodigy Finance is both an international loan provider and a responsible lender. That’s good news for borrowers as we adhere to the highest financial standards. And, it’s important to note that there are other factors that may impact your choice of loan offers than simply the APR or amount of loan you may qualify for.

In some countries, you may receive tax breaks on the interest paid on an educational loan. As an international loan provider you won’t qualify for these deductions.

If you or a co-borrower (which is not the same as a co-signer) has an exceptionally high income and would benefit from such tax exemption, you may indeed want to consider a local loan if you live in a country that provides for such a tax break.

On the other hand, to reap these benefits, you’ll need to repay your loan over an extended period rather than paying it off as quickly as you possibly can. It’s impossible to advise generally on the correct balance between interest and tax deductions; this is something to discuss with a private financial planner, as there are plenty of variables that will affect your situation.

Over the past decade, Prodigy Finance has found that many students are interested in:

    Remaining in the country of study after graduation to gain additional experience.
    Repaying their loan as quickly as possible. As 80% of Prodigy Finance borrowers hail from emerging economies, they also prefer to repay loans while they are still in their host country to minimise currency fluctuations.

Either one of separately, but definitely both together negate the benefits many borrowers might receive from tax breaks. It’s worth looking at your long-term intentions.

Credit reports

Prodigy Finance now reports to CallCredit in the UK and are working to extend this to additional credit bureaus before the end of 2018. This has immense benefits for international students hoping to remain in their host countries post-graduation. Your Prodigy Finance loan will reflect on your credit history, establishing borrowers financially in their host country.

4. The Prodigy Finance admin fee

Prodigy Finance loans have no hidden fees.

You’ll be able to see exactly what’s attached to the amount of money you borrow. There is also a 2.5% admin fee.

There are no other fees attached to your loan so long as repayments on the loan are up to date or ahead of schedule.

Provided you make the minimum required payments, you’ll never see forex conversion, additional processing fees, sanction letter fees, payment charges, insurance, taxes, or any other fee on your Prodigy Finance loan. The only applicable fee is your admin fee, so long as your account is in good standing.

Instead, you pay 2.5% of the amount you borrow from Prodigy Finance, or a minimum of US $500 (GP £500 / EU €500).

The admin fee is only applied to the amount you borrow. It’s possible to reduce the size of your loan from Prodigy Finance to the minimum amount for your programme and school - even after accepting your loan, but before signing your loan agreement when arriving on campus. Doing this reduces your admin fee accordingly - and is one of the reasons why you don’t need to pay the admin fee when you initially accept your provisional loan offer.

5. Loan margins and maximum loan amounts

The maximum amount an international student is able to borrow from Prodigy Finance is dependent, in part, on the university and programme they pursue. In some cases, this may be up to 100% of the total Cost of Attendance (CoA equals tuition plus living expenses) provided by the university.

However, not all students are approved to borrow the full amount based on their personal financial profile and the financial earnings potential data available for the course in question.

When 100% of the CoA is not borrowed from Prodigy Finance, it's critical that borrowers demonstrate to Prodigy Finance that additional funds are available for their education. The demonstration of adequate funding is required to secure international study visas.

Demonstration of available funds is different than having this amount in your bank account; funds do not need to be liquid at this stage.

What’s critical is that you’re able to demonstrate the remaining amount needed to meet the school’s stated cost of attendance. Students wishing to study in the United States must prove they have access to the full CoA at the same time as you must submit proof to receive your I-20 form - and there is no way to apply for a US F-1 student visa without the I-20 form and you are not officially enrolled in a university until this occurs.

Students who are unable to prove to the university that they have sufficient funds to meet the stated CoA will be denied an I-20 form and will not be able to submit an international student visa application.

With these rigorous standards in mind, and because the majority of Prodigy Finance borrowers pursue their masters degrees in the United States, Prodigy Finance works with best practices to assist students and their universities to ensure the minimum financial benchmarks needed for visa processing are met.

6. Understanding interest rate parity and currency behaviour

At Prodigy Finance, we believe it’s important for potential borrowers to review all of their available loan options before making a decision that’s personally and financially responsible.

For example, international students pursuing an American masters degree, should consider loans from US banks, alongside Prodigy Finance loans, alongside loans that may be available from a student’s home country.

The last part is where it becomes quite tricky as you can easily compare the APR of a loan from a US lender to the APR provided from Prodigy Finance as they’ll both be available for a US dollar loan amount. But, what are you supposed to do when the loans available in your home country are in rubles, rupees, or reals?

Tricky, right?

And, if you don’t have a finance or economics background, you might be tempted to run a search on Google for a tool to help you compare interest rates between currencies, such as interest rate parity.

However, to understand the behaviour of your currency, you can’t look at interest rate parity in isolation. There are several variables you must bear in mind:

    1. Budget deficit: If the government spends more than it earns, it’ll issue additional domestic currency.
    2. Trade deficit: If the economy exports more than it imports, it’ll earn more foreign currency.
    3. Monetary policy: Interest rate differential could impact the currency (this is known as Interest Rate Parity).
    4. Inflation: When an economy experiences inflation, domestic prices impact domestic currency.
    5. Productivity: When the economy has higher productivity, enhanced production eases domestic currency.
    6. Foreign Institutional Investors (FII) and Foreign Direct Investments (FDI): Institutional investors chase the best returns in global markets, while the inflow of foreign capital benefits domestic currency.
    7. Central bank intervention: Central banks (and markets) prefer stable currencies and will intervene with their foreign exchange reserves to maintain stability.

Borrowers without an economics background should always be careful of using such models to make financial decisions - and may want to consult financial advisors if they’re concerned about potential forex losses.

That’s not to say, however, that international students shouldn’t be concerned about currency exchange rates.

In our example of an international student pursuing an American masters degree, Prodigy Finance mitigates at least one major forex concern by disbursing the principal loan amount directly to the school in US dollars. For students wishing to gain greater experience by remaining in the US with a valid work visa may find a loan in US dollars to be the easiest for them.

Choosing the best educational loan for you

Not everyone has a full range of choices when it comes to international students loans. The banking norms in some countries attach certain minimums, requirements, or stipulations that some students simply can’t meet.

However, borrowers that do have a choice should consider all aspects of a loan. While we can’t speak for other loan providers or their borrowers, we know that having a no-collateral, no co-signer option makes a big difference to many of our borrowers. Not only that, but we support students through their international masters study through career services and future networking events.


Want to know more about Prodigy Finance?

Whether you're interested in an international student loan or you just want to know more about the company, we're always here to help. Not sure where your inquiry should go? Send an email to and we'll get back to you ASAP.

The purpose of this article is to provide general information on some of the concepts and topics, such as APR, variable interest rates, fees and comparison of loan offerings, as it applies to student loans. This article and its contents do not constitute financial advice directed at any particular person nor an offer to apply for a loan from Prodigy Finance.
Re: OPINION POST- INDIAN PUBLIC BANKS vs PRODIGY FINANCE!   [#permalink] 14 May 2018, 01:12
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