Prodigy Finance and Indian Public banks: Myth vs Reality

Prodigy FinanceProdigy Finance is a trending finance option in 2018 among Indian students looking to study abroad. Prodigy Finance 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. Primarily, students approached WeMakeScholars for a loan from Prodigy Finance when they don’t have a collateral and no co-applicant. For such students, we always recommended Prodigy Finance, as it was slightly better than others in the market.

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:

  1. Interest rate
  2. Income Tax exemptions
  3. Processing Fee
  4. Loan Margin
  5. Interest rate parity

 

1. Interest rate- Prodigy Finance

Prodigy FinanceFor 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 for MS programs 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.Prodigy finance USD LIBOR 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. Check the forecast details

 

 

2. Income Tax exemptions– Prodigy Finance

Prodigy FinanceMany 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:

  1. 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)
  2. 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)
  3. 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.

View the recent webinar explaining everything about the Income Tax redemption of study abroad education loan- Details, how to claim it and a few critical tips!

 

3. Processing Fee– Prodigy Finance

Prodigy FinanceYou 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.

 

 

4. Loan Margin– Prodigy Finance

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).

Prodigy FinanceBut 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 doesn’t approve your loan for the second year of your education if you are not showing the whole margin for 2nd yr in your account.

Read more: SBI education loan for abroad studies and application form details

 

5. Interest rate parity– Prodigy Finance

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.

Prodigy FinanceIf 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)

Prodigy Finance

Last 10-year growth comparison of USD to INR value

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.

 

Summarizing:

  1. 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.
  2. 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.
  3. 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. WeMakeScholars can help you with the US lenders application as well.

 

Busting the marketing jargon of Prodigy Finance:

No offense, but the Prodigy Finance team usually mention the below points in its defense. Let me clarify that as well:

  1. 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!
  2. 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? 
  3. 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.
  4. 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)

If you are planning for an abroad education loan, then going through this recent webinar session would be very informative. It was hosted by Damini from WeMakeScholars team.

Below is another webinar session hosted by Damini recently on the topic- Comparing International Edu loan lender with Indian banks- whom to choose? The session is a detailed discussion of this article, giving a better idea to students. In case you missed it and still have any questions, you can discuss either with me or with Damini.

 

Note: WeMakeScholars is an organization funded and supported by the IT Ministry, Govt. of India, under Digital India Campaign. It is established to help students with international education finance. It was started as a scholarships platform and eventually went on to provide unbiased support for education loans for as well. WeMakeScholars works with 14 Public and private banks/ NBFCs in India and abroad- both collateral based and non-collateral.

If you are an aspiring student applying for an abroad education loan, you can request a callback from the WeMakeScholars team. The financial officer will get back to you and guide you until sanction. Please note there is NO fee charged by WeMakeScholars. Being a Digital India campaign supported organisation, all the services are at free of cost.

If any of the facts or figures about Indian lenders seems incorrect to you, then you can approach us for proofs. But at the same time, you need to accept that you got so tied up with flowery production description of private lenders, and you forgot to do your homework. 

 

References: NDTV Profit, XE.com, Investopedia, Morgan Stanley, Investing.com

Disclaimer: This article is ONLY intended to empower students by explaining the complete details, helping them to make an informed decision about their foreign lender.

Written by

Pursuing #PhD from #Stanford University. Higher Education Expert- Stanford Scholarship winner- Interested in helping out fellow students with the scholarships and education loans.

 
  • Asmitha Sharma

    Hi Rishika, thanks for such a detailed article. It was really an eyeopener about Prodigy Finance. My sister was considering to apply for Prodigy Finance for her masters. She had been consulting me about the education loan options. I had researched about Prodigy Finance a couple of times as I never heard of Prodigy Finance before. I should admit that, neither she nor I had found such a detailed notes on Prodigy Finance.

    she was also confused between going to public bank or choosing Prodigy Finance. Initially, I was convinced with the fact that Prodigy Finance needs no collateral. We have a decent collateral (a house) which will be enough to get the education loan from Public banks. Never considered that option as I came to know about Prodigy Finance. But now, seems like we are losing a lot in the long run if going with Prodigy Finance. Being frank, I am still confused, so needed your opinion to take a decision.
    Hope you find time to reply. thanks in advance!

    • Rishika Singh

      Hi Asmitha, you’re welcome. As I clearly mentioned, only a very few students do their full homework about Prodigy Finance on these terms. If you have a collateral, I would definitely recommend you to go to Public banks rather than Prodigy Finance.

      I have seen many students thinking that the bank will take away the collateral if they miss a couple of EMIs (you have to start paying EMIs after course duration + 6 months). But, that is not how it works in reality. Rather, the bankers will try to convince you to pay EMIs, as much as possible. Because, from a bank’s point of view, its a tedious and cumbersome process to take your property and all. It can only be done after the court permits, which in India takes years as you know. So, summing up, you need not worry about giving a collateral to the bank, if you have one. Infact, you will have multiple benefits rather than disadvantages. In your case, I’m sure you can save thousands of dollars if you go via banks, rather than Prodigy Finance.

      Keeping all these in mind, I would definitely recommend going via a public bank rather than Prodigy Finance. Hope I was able to clear your doubt. Feel free to shoot any questions. As I’ve done a detailed research for a couple of months on this topic, I might be able to help you!

      • Asmitha Sharma

        Thanks Rishika for answering! I get it completely now. Keeping these parameters, we will be going for Indian banks instead of Prodigy Finance. Actually, we thought there was some issue with the collateral, so was hesitant to go ahead as it might get rejected from public banks. But, will be giving a good try now.

        In case the public bank option doesn’t work out, we are planning to go for NBFCs in India as the second option! Hope this plan sounds fine. Please suggest.

        • Rishika Singh

          Hi Asmitha, replying late as I was occupied this week. Yes, you can go with the plan. Sounds good for me. Don’t hesitate assuming they will reject. Try the public bank first, then Indian NBFCs rather than going to Prodigy Finance.

  • Rahul Bhasin

    Thanks a lot, this was really helpful (specially the 5th point). I was thinking to choose Prodigy Finance for education loan but now I won’t.

    • Rishika Singh

      Rahul, I have done a decent research around Prodigy Finance and unfortunately failed to find any info in the web regarding its side-effects. This is what made me write a detailed article about the other side of taking an education loan from Prodigy Finance. I was pretty sure that many students are unaware of these terms (kind of hidden-needs bit more homework) of Prodigy Finance.

      I firmly believe these terms should be clear to every student opting for Prodigy Finance. Anyways, the final decision is upto you to go ahead with Prodigy Finance or not. It’s you/ your family who will have to repay the amount in the coming years. Good luck!

      • Rahul Bhasin

        Many of my friends have already taken Prodigy Education Loan this year and many are planning to do so. I will be sharing this article with them. I am sure they won’t be aware of these side-effects. In fact, I was also enticed towards it because of their ‘No Collateral’ gimmick. Thanks…!

        • Rishika Singh

          Yes, I agree with you. The concept of “No-collateral” is in fact exploited in many ways by International lenders like Prodigy Finance. They clearly understood that it is the most important thing to entice Indian abroad education loan segment. Hardly students understand this in the first look. My main motive of this article is to give more power to students, helping them to take an well-informed decision. Because, I’ve seen from my friends, how hard is the repayment after the fancy phase of just borrowing. Companies like Prodigy Finance make decent business within the first step itself, by charging a just from the whooping 2.5% processing fee they charge from you. Ironically, upon my interaction with few students on Quora, they didn’t even know that Prodigy Finance charges them the processing fee. The most funny part I found is, the Prodigy Finance makes you pay interest even on the processing fee by adding it to the loan amount- by saying that “you need not worry paying now, you can do it later”. Pathetic!

          So, as mentioned in this article, go for the best option, not just for the quickest! Speak with the WeMakeScholars team. They are pretty experts on this.
          Also, feel free to share this Prodigy Finance article with your friends!

        • Asmitha Sharma

          Totally agree with Rahul!

  • Saikiran Kadiyala

    a guy who doesn’t have any security but desired to pursue maters prodigy & other nbfc’s are best , like prodigy does all the nbfc’s provides education loan which cover living & college fee expenses ? if they provide a loan at what ratio they provide loan ? is there any nbfc which covers completes study & living expenses without collateral ?

    • Rishika Singh

      Hi Saikiran, as you mentioned, for those who dont have any collateral security, NBFCs are the option to go for. If you go through the article, I have mentioned the same. But, when you compare Indian NBFC with an International NBFC like Prodigy Finance, its preferable to go for the Indian ones for multiple reasons as highlighted in the article. Even the Indian NBFCs cover the entire expenses including the tuition fee, living expenses, travel expenses and any other miscellaneous. Also, they offer 100% of the expenses without any margin. Please speak with the WeMakeScholars team and they should be able to guide you with a better offer, than applying to these NBFCs directly.
      Good Luck!

  • Rock Solid

    Great article and very useful for students to know the truth about Prodigy Finance. I found the whole thing to be an eyewash. I considered them for financing my higher education. They hold all these seminars and call students and parents. The guys hosting are arrogant and unhelpful. Clearly they don’t really know what they are talking about. They won’t explain all the hidden charges clearly or the actual process which is quite difficult. They have WhatsApp group for misleading students. don’t even have registered office in India. Best to go with Indian NBFC. This is just dying international NBFC looking to cash in on the huge market of Indian students. Guys don’t fall for this FRAUD company.

  • Shalu Sharma

    Just a perfect example of how Statisticians can make anything work for them. You clearly manipulated numbers and ignore a few corner cases which work as a disadvantage for the NBFC.
    The entire article just falls apart considering the fact that Dollar to INR amount is not going to shift as much as quoted in your article any time soon. Yes the recession must have caused the conversion rate to jump from 44 to 62, but this is not shifting to that extent. Talking about the tax you save when you pay the NBFC, you just save on the interest, not on the entire EMI. Also only those who actually earn a lot and fall under the top most bracket of income save the tax, any middle class student is not really going to benefit from it. Also, you just save some percentage of the interest. For an EMI of 20,000 if Interest is 15,000 INR you save a part of 15,000, There are a few more cases you have used to manipulate people here. So Miss PHd from Stanford just so you are paid by “We Make Scholar” stop misleading people. Or may be you aren’t paid anything at all. Lets not also forget the FOREX conversion and the arrogant bank employees who would just force you to disburse the amount even after your education starts, adds up to even more interest. I may not be having a PHd but I am sure if I have time to invest, there are so many other points that go against the NBFC. APR is to be compared with APR , the NBFC will never disclose APR, Interest rate is what is charged by Prodigy…and so many other things written over here goes against your “Well -Researched article”. That being said, to each on his own. Good luck.

    P.S Will jut delete off this post after 24 hrs.

  • watson2

    “you need to accept that you got so tied up with flowery production description of private lenders, and you forgot to do your homework.”

    Being condescending makes you sound untrustworthy, coupled with those paid Quora answers, I don’t think I’d choose you. I know lots of people who’ve taken loans from prodigy and have had good experience. I’d rather trust them any damn day than haggling with indian banks for months. And not everybody has collateral or property lying around.

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