Choosing a loan with the best terms is crucial while purchasing a car, dream home or education loan. It is where a Loan Affordability Calculator becomes a powerful tool for making an informed and responsible choice.
What is Loan Affordability Calculator?
Our Loan Affordability Calculator helps you in calculating the maximum amount an individual can borrow. This calculator considers various factors such as income, expenses, and existing debt to determine the maximum loan an individual can take.
The Key Components/Inputs of Loan Affordability Calculator
- Monthly Income: Calculate your monthly income from all sources. It directly impacts the maximum amount you can borrow.
- Monthly Expenses: Calculate your total monthly expenses carefully. It is crucial for assessing how much of your monthly income can be allocated towards loan repayments.
- Monthly Savings: Monthly saving commitments also affect the maximum borrowing capacity since it reduces the portion of your income available for loan repayments.
- Existing Debts: If you already have debts, such as credit card outstanding, home loans or any other loans, the calculator will take them into account to calculate the maximum additional loan amount you can afford.
- Loan Term: The Loan Affordability Calculator will consider the term or duration of the loan you intend to take. A longer-term may result in smaller monthly payments and an increased borrowing capacity.
- Interest Rate: The interest rate on the loan you intend to take significantly impacts the total cost of borrowing. Lower interest rates mean lower monthly payments and vice versa.
How to Use the Loan Affordability Calculator?
- Collect All Financial Information: Before using this calculator collect all the financial information listed above.
- Enter Your Information: Input your monthly income, monthly expenses, existing debts and the desired loan term and interest rate into the calculator.
- Analyse the Results: Once you submit the information, the calculator will provide you with the three details:
1. Debt-to-Income Ratio: It is a critical financial matrix used by financial institutions to evaluate your borrowing eligibility.
2. Affordable EMI Amount: This is the maximum additional EMI you can afford to pay monthly.
3. Affordable Loan Amount: This is the maximum loan amount you can afford to borrow. - Refine Your Choices: Based on the results, you can review your options and adjust the loan amount or term to align with your financial capabilities.
Example of Using a Loan Affordability Calculator
Let’s see an example of how the Loan Affordability Calculator works for Mr Rajesh:
- Monthly Income: Mr Rajesh’s monthly income from all sources is ₹100,000.
- Monthly Expenses: After careful calculation, Mr Rajesh determines that his total monthly expenses amount to ₹35,000.
- Monthly Savings: Mr Rajesh is committed to saving ₹10,000 per month.
- Existing Monthly Debt Obligations: Currently, Mr Rajesh has existing debts, such as a credit card outstanding and a personal loan, which total ₹10,000 per month.
- Loan Term: Mr Rajesh plans to take a loan with a tenure of 5 years (60 months).
- Interest Rate: The interest rate for the loan Mr Rajesh intends to take is 8%.
Now, let’s see what the Loan Affordability Calculator calculates for Mr Rajesh:
- Debt-to-Income Ratio: The calculator calculates Mr Rajesh’s Debt-to-Income (DTI) ratio as 10%. This indicates that only 10% of his monthly income goes towards debt payments, which is a favourable ratio.
- Affordable EMI Amount: Based on his financial information, the calculator determines that Mr Rajesh can afford a monthly EMI of ₹40,500.
- Affordable Loan Amount: With the given inputs and considering Mr Rajesh’s financial capacity, the calculator finds that he can comfortably borrow up to ₹1,997,397.
Therefore, with a Debt-to-Income ratio of 10%, Mr Rajesh’s affordable EMI is ₹40,500, and he can take a loan of up to ₹1,997,397 without straining his financial situation. This knowledge empowers Mr Rajesh to make well-informed decisions and plan his financial journey wisely.
Advantages of Using a Loan Affordability Calculator
- Financial Clarity: It helps you understand the maximum amount you can borrow without straining your finances.
- Budgeting Aid: By considering your monthly expenses and income, the calculator aids in budgeting by allowing you to make adjustments to take a loan.
- Comparison Tool: The calculator enables you to compare the affordability of various loan offers based on their interest rate and term.
- Avoiding Overborrowing: Overborrowing can lead to default on loan repayments. The calculator ensures you stay within a safe borrowing limit.
- Negotiation Tool: Armed with the knowledge of your affordability, you can confidently negotiate loan terms with lenders and get the best possible deal.
Final Words
A Loan Affordability Calculator helps you make informed financial decisions. It provides you with useful information such as Debt-to-Income Ratio, Affordable EMI Amount and Affordable Loan Amount based on your financial situation. With this information, you can confidently plan your future financial commitments.