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Prodigy Finance: APR explained

Rishabh Goel - May 02, 2018

APR Explained Screen


Taking out a loan can seem like a complicated process, especially if financial terms aren’t part of your every day lingo.

Traditionally, many people think that the interest rate is the deciding factor on which to take out a loan, but interest rates are deceptive because they have little to do with the actual amount you’ll pay to borrow the money you need – especially if you want a loan with a variable interest rate that shifts as the economy does.

The most important figure is the Annual Percentage Rate (APR).

APR is the key tool for comparing different loan offers, and understanding the total cost of borrowing over the duration of a loan. 

Understanding APR can help save you money. 

APR is a financial tool that will help you understand all costs involved in your loan beyond just the interest rate. Loan providers structure their products differently, so by using APR to understand the total cost of your loan, it makes it much easier to compare offers from different providers, and thereby get the best offer for your individual needs.

Industry regulations mean that APR is calculated the same way by all lenders and is made up of the following: 

Interest rates
  • Fixed margin
  • Variable rate
Costs such as (but not limited to)
  • Transaction/origination
  • Servicing
  • Repayment
How interest is charged
  • Simple vs Compound
Loan schedule
  • Disbursement schedule
  • Repayment tenure
  • Fee dates

To show this through an example from Prodigy Finance and "competitor X", you can see how different structures of a loan offer will have an impact on the total cost of your loan over time:

Prodigy Finance

"competitor X"

Fixed margin

Up to 8.5% 

Varies

Variable rate

3-month LIBOR (USD/GBP/EURO), determined independently by financial institutions

Could be local variable rate governed by financial markets or proprietary variable rates that the lender can change

Origination fee

2.5% administration fee

Admin Fee + insurance + taxes (possibly more) 

Servicing fee

None

Currency conversion charges

Repayment

No prepayment penalties

Possible prepayment charges

Simple or compound interest

Simple during study and grace period; reducing balance after required monthly payments

Usually compound (simple, if interest is paid every month)

Disbursement schedule

Disbursements per semester directly to university according to deadlines

Usually disbursed to student account before deadline

Repayment tenure

6 months Grace Period and 7,10,15, or 20 years of repayment

Varies

Fee dates

On first disbursement date - only for that year’s disbursement amount

Usually full amount charged with payment requirement before disbursement

Why do lenders use APR?

For transparency. 

By making it easier for customers to understand the total cost of a loan is lenders are taking another step in responsible lending. 

Many mature financial markets have introduced the inclusion of APR to promote greater transparency; Prodigy Finance is regulated in the UK and where the FCA have made it is a legal requirement to include APR in loan information.

How to calculate APR

Identify all costs of your loan

There are multiple costs to a loan product. The most prominent of them is the interest rate. Furthermore, the lender may charge additional fees for originating, servicing, and repaying the loan.

Prodigy Finance has only a one-time administration fee. There are no other costs or hidden charges with Prodigy Finance.

The following example illustrates how APR captures the impact of the administration fee with Prodigy Finance:

  • 7.00 % Prodigy Finance fixed margin (fixed rate of interest)
  • 9.34 % per annum simple variable rate fixed rate floating on base rate (3-month USD LIBOR of 2.31% as on January 08, 2018)
  • 9. 76% APR including the effect of all financing costs (including impact of one-time admin fee of 2.5% of loan amount)
Prodigy Finance APR loan graphic

Check if your interest is simple or compound

Prodigy Finance loans have simple interest while the student is studying. The APR from lenders who use compound interest would be ~10bps (0.10%) higher. 

Understand your loan schedule

If two financial products were identical, except for their disbursement schedule – loan products that require higher upfront disbursement will have a greater APR.

Moreover, requiring upfront payments translates into higher APR (everything else remains constant).

Common mistakes to avoid when using APR

APR vs Interest Rate

You should not assume that APR is the same as the interest rate on your loan. APR, by definition, includes all costs of your loan where interest rate is a component of the loan.

Even if some regions do not require lenders to disclose APR, the financial regulators understand the challenges with hidden fees and act proactively to protect consumer interest.

APR vs Monthly payments

Borrowers often use monthly payment amount to compare the cost of loan products. However, this approach has three challenges:

  1. Monthly payments are a function of repayment tenure. So it’s hard to compare loan products using monthly payments if the repayment tenure is different.
  2. Many fees are paid upfront (or outside of monthly payments), and hence not incorporated in monthly payments.
  3. Many borrowers wish to prepay and monthly installments might not accurately represent potential prepayment benefits.

Prodigy Finance does not have any out of pocket expenses – you just need to make monthly payments. 

Moreover, there are no prepayment penalties and you can prepay as much amount you wish, any number of times, at any point of the loan.

The limitations of APR

While APR is a great tool to compare loan products, it has certain limitations.

Frequency of compounding

APR does not include the frequency with which your annual rate is compounded. This is relevant only for compound interest, and not simple interest.

This is not a concern with Prodigy Finance loans. Prodigy Finance charges simple interest during your study + grace period, and when you start repaying – interest is charged monthly on reducing balance.

Product costs

While APR will capture all the costs of the financial product, there might be additional costs for the customer to avail the financial product.

Loans that have co-signers may ask for a life insurance to protect the cosigner from unfortunate circumstances to the primary borrower. Prodigy Finance does use co-signers and does not require life insurance.

Moreover, some loan products might be issued in a different currency and attract additional currency conversion charges. If you’re studying in the US, Prodigy Finance loans are in USD, and you do not need to pay any fees for converting your currency when paying your tuition or living expenses, or when repaying the loan.

Finally, we strongly advise that you investigate if there are other costs involved that may not reflect in the APR. At Prodigy Finance, we are transparent about our zero out-of-pocket expenses: all costs to the student reflect in the one-time 2.5% administration fee.

Quality/Service of Financial Product

While APR is a great tool to understand the true cost of your loan, it does not capture the quality and service of the loan product, or community benefits that come with your loan.

We know what it takes to move your life abroad. Our benefits are tailored to the challenges that international students face.

These include how to guides such as how to transfer your savings overseas without incurring fees, as well as career services if you're looking to remain in your country of study after graduating. 

Prodigy Finance

"competitor X"

Disbursement

Managed fully by Prodigy Finance in close communication with university financial aid offices

Usually managed by students

Campus support

Prodigy Finance team visits campuses and supports campus events

Limited to none

Career services

Dedicated Careers Team to help you secure the right job

Limited to none

International offices

Offices in London, New York, and Cape Town with campus visits across supported schools

Rare

Investors

Community investors supporting international education

Varies

APR is an important tool in calculating the total cost of your loan and for comparing offers from different lenders, and is legally mandated in many countries. While it can help save you money in the long term, it’s not the only factor to consider when assessing the cost of a loan. 

Make sure to research the monthly payment amount, credibility of the lender and additional benefits provided before you commit to taking a loan.

Still not sure which way to turn? 

Educational loans affect your finances for a very long time; you need to be confident with your decision, and it doesn’t hurt to check with a financial advisor that can point you in the right direction. Their advice won’t come for free, but when every cent counts, it could be the best thing you’ve ever done… well, besides going back to school.


Is it time to consider the APR on an educational loan for your dream masters degree?

Prodigy Finance provides loans to qualified international students pursuing their masters degrees at top universities. 


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