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Car Loan Borrowing Capacity Formula:
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The Car Loan Borrowing Capacity Calculator helps determine the maximum amount you can borrow for a vehicle loan based on your income, existing debts, and the loan interest rate. It uses a standard financial formula to assess affordability for vehicle loans.
The calculator uses the following formula:
Where:
Explanation: The formula calculates the maximum car loan amount by considering 35% of your income as available for debt payments, subtracting existing debts, and dividing by the loan rate to determine borrowing capacity.
Details: Properly calculating car loan affordability helps prevent over-borrowing, ensures manageable monthly payments, and maintains healthy financial stability while acquiring a vehicle.
Tips: Enter your monthly income in currency, total monthly debt obligations in currency, and the car loan interest rate as a decimal. All values must be positive numbers.
Q1: Why use 35% of income for debt calculation?
A: 35% is a common debt-to-income ratio threshold used by lenders to determine affordable borrowing capacity while maintaining financial stability.
Q2: What should be included in "Other Debts"?
A: Include all monthly debt obligations such as credit card payments, student loans, mortgage/rent, and other loan payments.
Q3: How is the car loan rate converted to decimal?
A: Divide the annual percentage rate (APR) by 12 to get the monthly rate, then convert to decimal (e.g., 6% APR = 0.06/12 = 0.005).
Q4: Does this calculation include other car-related expenses?
A: No, this calculation only determines loan borrowing capacity. Additional expenses like insurance, maintenance, and fuel should be budgeted separately.
Q5: Is this calculation applicable for all types of vehicle loans?
A: Yes, this formula can be used for calculating borrowing capacity for various types of vehicle loans, including new and used car loans.