Prodigy Finance Interest Rate Calculation: Student Loan APR explainer guide

Need a quick explanation of the Annual Percentage Rate and how it applies to your international student loan? This short video will help you understand Prodigy Finance APR and Prodigy Finance interest rates:

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 the loan. But interest rates 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. This is when calculating APR on student loans becomes important. But what does APR stand for in finance?

APR explained: What is APR? What does it indicate?

APR, that stands for annual percentage rate, essentially indicates the interest charged on loans on an annual basis. It helps the borrowers to be aware of potential costs of the loan borrowed and the yearly interest they’ll have to pay.

Annual Percentage Rate (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.

What does APR represent?

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:

APR explained: Why do lenders use APR?

For transparency.

By making it easier for customers to understand the total cost of a loan, 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.

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 charges one fee per loan, nothing’s hiding in the fine print.

The next question you might have: How do you calculate the APR on your prodigy finance loan?

Prodigy Finance loan interest rate calculator

How is the interest calculated on your Prodigy Finance Student Loan?

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

• 6% Prodigy Finance fixed margin (fixed rate of interest)

• 5.06% annual simple fixed margin plus a variable base rate (Based on 30-day Average SOFR, quoted on 8 October 2024)

• 12.06% Prodigy Finance APR includes the effects of all financing costs (including impact of admin fee of 5% of the total loan amount)

Note: Prodigy Finance maximum loan amount that you’ll qualify for is based on your individual application, while the minimum loan amount is USD 10,000.

How is student loan interest calculated? Does it use simple or compound interest?

Prodigy Finance education loans have simple interest while the student is studying. The student loan 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).

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.

Is there any early repayment penalty?

With Prodigy Finance, you get student loans with no early repayment penalty. You can prepay as much as you wish, any number of times, at any point of the loan.

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 education 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 life insurance to protect the cosigner from unfortunate circumstances to the primary borrower. Prodigy Finance does not 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 student loan APR. At Prodigy Finance, we are transparent about our zero out-of-pocket expenses: all costs to the student reflect in the one-time 5% administration fee.

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.

Additionally, APR 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 the opportunity to become a study abroad mentor and join the Prodigy Finance Community.

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 adviser 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.