Wondering why Prodigy Finance doesn't have much to say about EMI? Looking for it on your provisional loan offer and can't find it?
If you’re considering an international study loan with Prodigy Finance, you won't see the same metrics as you would on a local study loan.
Take a moment to find out why and why Prodigy Finance uses APR instead.
EMI and fixed-rate loans
In some countries, banks use Equated Monthly Instalment (EMI) to give potential borrowers a breakdown of repayments and to show the cost of the loan.
This figure represents the amount to be paid monthly – and it’s based on a fixed rate of repayment; whatever you pay, you pay the same amount every month.
Work out EMI using this equation:
(P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)
- P – principal amount borrowed
- I – annual interest rate
- R – periodic monthly interest rate
- N – number of monthly payments
- T – 12 (number of months in the year)
Borrowers can use EMI to compare loans provided the number of monthly payments is equal across all loans in question. Or, if the total amount is more important, you can consider that figure before dividing by the repayment duration.
Limitations of EMI
For a start, EMI depends on a fixed interest rate. While that certainly appeals to some borrowers, it can strain lenders when the interest rate drops; everyone who has the option will wait until this time to apply for financing. And, if you lock yourself into a loan with a high interest rate, there’s often no getting out of it.
Moreover, EMI doesn’t easily allow for pre-payments, over-payments, and, therefore, early repayment. (Prodigy Finance encourages borrowers to repay their loans early, if they can.)
Any time extra money would be thrown at the account, the lenders would need to recalculate the repayment schedule. Not only does this require additional work, but it also reduces the guaranteed earnings on interest. This is why there are penalties associated with early repayment of fixed-rate loans in some countries.
Prodigy Finance uses APR
If you expect fixed-rate loans because that’s the norm of your home banking system, you might expect to see EMI on your loan documents.
But you won’t find it in your Prodigy Finance provisional loan offer; EMI can’t be used as there is a variable base rate - which is common across the world's strongest markets.
Instead, Annual Percentage Rate (APR) is used on Prodigy Finance loans.
What is APR?
APR takes into account the principal amount borrowed, as well as interest rates. It also includes any fees associated with the account (with the exception of late or other fees that are only levied if the borrower contradicts the terms of the loan).
Want to understand APR better? Watch this short video which explains APR in the simplest possible terms:
APR is similar to EMI as it is a means of comparing apples to apples. It's expressed differently, but it’s still a means of comparison.
But, it’s different from EMI because APR can represent variable interest rates.
Prodigy Finance, for example, provides loans with a LIBOR base. Your interest rate changes according to LIBOR fluctuations for the currency of loan dispersal.
Practically, this means that repayment amounts change over time. The minimum repayment amount you pay this month may be different than your expected contribution next month. Loans are recalculated every month based on the current balance and the current interest rate.
Benefits of APR for loan comparison
But, a key benefit of variable interest rate loans is the ability to make extra payments and early repayments. Whenever money comes your way, you can put it towards your loan to reduce your debt burden, paying less interest over time and paying off the balance faster.
APR is just the tool you use to variable interest rate loan products with one another. And, at the same time, you don’t have to lock yourself into a set duration as you would find with fixed-interest loans using EMI as your comparison tool.
While it may not seem normal to you now, it will once you get the hang of it. And, if you’re headed overseas for an international grad school education, getting the hang of new norms is something you’ll get used to quickly - just as this international master's student did. See why a Prodigy Finance loan was right for Niharika here:
Want to learn more about financing your international education?
Prodigy Finance offers you competitive loans that are breaking traditional barriers and affording you the opportunity to achieve more.
Prodigy Finance Ltd is authorised and regulated by the Financial Conduct Authority.
Post updated for accuracy and freshness on November 4, 2019. Originally published on March 22, 2018.