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.

Want to see our APR explanation video in full screen? Check it out here!

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

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.