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Personal Loan Capacity Formula:
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Personal loan capacity refers to the maximum loan amount a borrower can afford based on their income, existing debts, and the monthly interest rate. It helps determine borrowing limits while maintaining financial stability.
The calculator uses the personal loan capacity formula:
Where:
Explanation: The formula calculates how much additional loan payment a borrower can afford after accounting for existing debts, using 40% of income as the maximum debt-to-income ratio.
Details: Calculating loan capacity helps borrowers avoid over-indebtedness, ensures loan repayments remain affordable, and assists lenders in making responsible lending decisions.
Tips: Enter your monthly income, existing monthly debt obligations, and the monthly interest rate as a percentage. All values must be positive numbers.
Q1: Why use 40% of income in the calculation?
A: 40% is a common debt-to-income ratio threshold used by lenders to ensure borrowers can manage their debt payments while covering living expenses.
Q2: What should be included in existing debts?
A: Include all monthly debt obligations such as credit card payments, car loans, student loans, and other personal loans.
Q3: How is the monthly rate different from annual rate?
A: The monthly rate is the annual interest rate divided by 12. Make sure to convert annual rates to monthly before input.
Q4: What if my capacity calculation is negative?
A: A negative result indicates that your existing debts already exceed 40% of your income, suggesting you may not be able to afford additional borrowing.
Q5: Is this calculation applicable for all types of loans?
A: While the principle applies broadly, specific loan types may have different eligibility criteria and affordability assessments.