1. What is the Borrowing Capacity Calculator?

The Borrowing Capacity Calculator estimates the maximum loan amount an individual can afford based on their monthly income, expenses, desired loan term, and current interest rates. It provides a general assessment of borrowing capacity for various types of loans.

2. How Does the Calculator Work?

The calculator uses the borrowing capacity formula:

Where:

• Monthly Income — Total monthly income in currency units
• Monthly Expenses — Total monthly expenses in currency units
• Loan Term — Duration of the loan in months
• Monthly Interest Rate — Monthly interest rate as a decimal

Explanation: The equation calculates the maximum loan amount by determining the available monthly funds after expenses, multiplied by the loan term, and divided by the monthly interest rate to account for interest payments.

3. Importance of Borrowing Capacity Calculation

Details: Calculating borrowing capacity is essential for financial planning, ensuring loan affordability, preventing over-indebtedness, and making informed borrowing decisions that align with one's financial situation.

4. Using the Calculator

Tips: Enter accurate monthly income and expense figures, select an appropriate loan term in months, and input the current monthly interest rate as a decimal. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What constitutes monthly income?
A: Monthly income includes all regular sources of income such as salary, wages, bonuses, rental income, and other stable earnings.

Q2: What expenses should be included?
A: Include all regular monthly expenses such as rent/mortgage, utilities, groceries, transportation, insurance, and other recurring payments.

Q3: How does loan term affect borrowing capacity?
A: Longer loan terms generally increase borrowing capacity as payments are spread over more months, but also result in more total interest paid.

Q4: Are there limitations to this calculation?
A: This is a simplified calculation that doesn't account for additional fees, changing interest rates, or unexpected financial changes. Actual loan approval may consider additional factors.

Q5: Should this be used for all types of loans?
A: While the formula provides a general estimate, specific loan types (mortgage, personal, auto) may have different qualification criteria and calculations.