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Loan Affordability Formula:
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The Loan Affordability Calculator helps determine how much you can borrow based on your income, existing debt obligations, interest rate, and desired loan term. It uses the 36% debt-to-income ratio rule to ensure manageable payments.
The calculator uses the following formula:
Where:
Explanation: The formula first calculates your maximum available monthly payment (36% of income minus existing debt), then converts this to a total loan amount based on the interest rate and term.
Details: Calculating an affordable loan amount helps prevent overborrowing and ensures you can comfortably make payments without financial strain. Lenders typically use similar calculations when evaluating loan applications.
Tips: Enter your gross monthly income (before taxes), all existing monthly debt payments (credit cards, car loans, etc.), the expected annual interest rate, and your desired loan term in months. The calculator will show the maximum loan amount you can comfortably afford.
Q1: Why use 36% as the debt-to-income ratio?
A: 36% is a common guideline for manageable debt levels, though some lenders may allow up to 43%. Staying at or below 36% helps ensure financial stability.
Q2: Should I include my mortgage payment in "other debt"?
A: For personal loans, typically only include non-mortgage debt. For mortgage applications, include all debt obligations.
Q3: What if the calculator shows $0 affordable amount?
A: This means your existing debt payments already exceed 36% of your income. You may need to pay down debt before taking on more.
Q4: How accurate is this calculator?
A: It provides a good estimate, but actual loan approvals may consider additional factors like credit score and lender policies.
Q5: Should I borrow the maximum amount shown?
A: Not necessarily. Consider borrowing less to maintain financial flexibility and account for unexpected expenses.