1. What Is The Borrowing Capacity Calculation?

The borrowing capacity calculation helps individuals determine how much they can potentially borrow based on their gross income, existing debts, and interest rate. It provides a realistic estimate of borrowing power for personal financial planning.

2. How Does The Calculator Work?

The calculator uses the borrowing capacity formula:

Where:

• \( Gross Income \) — Total income before deductions
• \( 28\% \) — Standard percentage used for debt-to-income ratio
• \( Debts \) — Existing monthly debt obligations
• \( Rate \) — Interest rate (converted to decimal)

Explanation: The formula calculates the maximum amount an individual can borrow while maintaining a healthy debt-to-income ratio.

3. Importance Of Borrowing Capacity Calculation

Details: Understanding your borrowing capacity is crucial for responsible financial planning, loan applications, and avoiding over-indebtedness.

4. Using The Calculator

Tips: Enter gross income and debts in currency units, and interest rate as a percentage. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why use 28% as the income percentage?
A: 28% is a standard guideline used by many lenders to ensure borrowers maintain a manageable debt-to-income ratio.

Q2: What debts should be included?
A: Include all recurring monthly debt obligations such as credit card payments, car loans, and other personal loans.

Q3: How accurate is this calculation?
A: This provides an estimate - actual borrowing capacity may vary based on lender policies, credit history, and other factors.

Q4: Should this include all income sources?
A: Yes, include all verifiable sources of gross income for the most accurate calculation.

Q5: Can this be used for mortgage calculations?
A: While the principle is similar, mortgage calculations often use more complex formulas that include additional factors.