1. What is the Personal Loan Borrowing Capacity Calculator?

The Personal Loan Borrowing Capacity Calculator estimates the maximum amount you can borrow for an unsecured personal loan based on your income, existing debts, and the monthly interest rate.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( \text{Income} \) — Your total monthly income (currency)
• \( \text{Debts} \) — Your total monthly debt obligations (currency)
• \( \text{Monthly Rate} \) — Monthly interest rate as decimal (e.g., 0.01 for 1%)
• 0.4 — Standard debt-to-income ratio limit (40% of income)

Explanation: This formula calculates how much you can afford to borrow while maintaining a healthy debt-to-income ratio.

3. Importance of Calculating Borrowing Capacity

Details: Understanding your borrowing capacity helps prevent over-indebtedness, ensures loan affordability, and improves financial planning for unsecured personal loans.

4. Using the Calculator

Tips: Enter your monthly income, total monthly debt payments, and the monthly interest rate as a decimal. All values must be valid positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why use 40% of income in the calculation?
A: Most lenders use a 40% debt-to-income ratio as a standard threshold for loan affordability assessment.

Q2: What counts as "debts" in this calculation?
A: Include all monthly debt obligations such as credit card payments, car loans, student loans, and other personal loans.

Q3: How do I convert annual interest rate to monthly?
A: Divide the annual rate by 12. For example, 12% annual rate = 0.01 monthly rate (0.12 ÷ 12 = 0.01).

Q4: Are there other factors that affect borrowing capacity?
A: Yes, lenders also consider credit score, employment history, and overall financial stability beyond this basic calculation.

Q5: Is this calculation accurate for all types of personal loans?
A: This provides a general estimate for unsecured personal loans. Secured loans or specialized loan products may have different calculations.