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Things To Consider When Taking An International Loan: Hidden Cost Of Currency Depreciation

Posted on May 19, 2017 Sponsored

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It is a great time to be pursuing higher studies. With the increase in number of lenders in the market, it is becoming easier to finance one’s higher studies. However, comparing different loan offers is not easy due to the variations in the way interest rates are calculated, processing fees, and other fees. It becomes even tougher when one needs to compare loans from Indian banks to loans from international players. In this blog post, we will debunk the myth that international loans are cheap through the lens of MBA courses.

Marketing: Get a student loan through GyanDhan and buy a 2017 Mercedes Benz CLA with the savings. I must be kidding, right? The answer to this question, as is the case with most questions once you have completed your MBA, is ‘it depends’.

Welcome to the wonderful world of marketing. One of the 4Ps of marketing is price, and this is where the international lenders have a significant advantage. Customers, students in this case, are attracted to the low nominal cost (interest rates). The truth is it might be an expensive option for an individual. The devil is in the detail and we should attend other classes to get the right answer.

Accounting: The difference in total payments you are expected to make if you choose a loan from an international loan provider vs getting a loan through GyanDhan is sufficient to buy a Mercedes. The numbers below will give you an idea of how you can save close to 22 lakhs taking a secured loan from GyanDhan.

Key assumptions:

Loan amount: $100k to be paid in equal instalments at the start of year 1 and 2

Study period: 2 years, during which no interest payment is required. Simple interest is calculated on the outstanding loan amount and gets added to the loan

Repayment period: 7 years, with repayment starting immediately after graduation

Loan termsInternational lenderGyanDhan
Interest rate7.5%9.6%
Processing fee$2,500 (2.5% of loan amount)Rs. 10,000
EMI$1,755Rs. 127,237
Total payments due$ 147,443Rs. 10,688,000
Total payments due (in INR)Rs. 12,899,959Rs. 10,688,000

How can the 7.5% loan be costlier than the 9.6% loan? Enter ECO101.

Economics: Interest rate parity refers to the fundamental equation that governs the relationship between interest rates and currency exchange rates.

GraphThe chart on the left shows the expected value of 1 USD in INR based on the forwards. We expect the currency to depreciate at an annual rate of 4.8% going forward. This is in-line with average depreciation of 4.7% over the last decade.

This means that your EMI of $1,755 will be 60% costlier in Rupee terms in 2027, and 50% costlier than the rupee loan.

Decision science: What are potential pitfalls of getting a loan from GyanDhan and buying a Mercedes with the ‘savings’?

  1. Your savings will accrue over multiple years but the outlay for Mercedes will be upfront.
  2. How do these numbers change if you decide to make pre-payments using your annual bonus or savings?

This is when time value of money (NPV) is useful and modelling different scenarios is useful. Assuming a discount rate of 18%, and even after accounting for different scenarios of pre-payments (ranging from no pre-payment to pre-payment in 3 years) you end up saving close to 5.5 lakhs on the GyanDhan loan when compared to the US loan.

Conclusion:

You should prefer an international lender for your requirements only under the following conditions

  1. You do not have a collateral but need a loan amount beyond 30 lakhs.
  2. The interest rate offered by the international lender is at least 5% lower than the rate offered by the Indian bank.

In all other cases, GyanDhan can help you with significant savings through our suite of loan options. 

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