The Loan Affordability Calculator helps you estimate the maximum loan amount you might be able to borrow based on your income, existing debts, and the terms of the loan. This is a crucial step in financial planning, whether you're considering a mortgage, car loan, personal loan, or business financing. It helps set realistic expectations and guides your search for financial products.
How it Works: The Math Behind Affordability
Lenders assess your ability to repay a loan by looking at your debt-to-income ratio (DTI). While this calculator doesn't directly calculate DTI, it uses a simplified approach to estimate maximum loan size by considering your disposable income and the loan's characteristics.
The core idea is to determine how much of your monthly income is available for new debt payments after covering essential living expenses and existing debts. A common guideline is that your total monthly debt payments (including the new loan) should not exceed a certain percentage of your gross monthly income (often around 36-43% for a good DTI, though this varies by lender and loan type).
This calculator focuses on the maximum monthly payment you can comfortably afford for a *new* loan.
Calculation Steps:
Calculate Available Monthly Income for New Debt:
This is your Monthly Income (After Tax) minus your Existing Monthly Debt Payments.
Available Income = Monthly Income - Current Debts
Calculate the Maximum Affordable Monthly Loan Payment:
While lenders have specific DTI thresholds, for a simpler estimation, we can assume a portion of the available income can be allocated to the new loan. This calculator assumes you can allocate *all* of your available income towards the new loan payment to find the theoretical maximum.
Max Monthly Payment = Available Income
Calculate the Maximum Loan Amount:
This uses the loan payment formula, rearranged to solve for the Principal (the loan amount).
The formula for the monthly payment (M) of a loan is:
$M = P \frac{r(1+r)^n}{(1+r)^n – 1}$
Where:
n = Total Number of Payments (Loan Term in Months)
Rearranging to solve for P:
$P = M \frac{(1+r)^n – 1}{r(1+r)^n}$
In our calculator:
M = Max Monthly Payment (calculated in step 2)
r = Estimated Annual Interest Rate / 12 / 100
n = Loan Term (in Months)
Important Considerations:
This is an Estimate: Lenders use complex algorithms and consider many factors, including your credit score, employment history, collateral (if any), and overall financial health. This calculator provides a starting point, not a guarantee of loan approval or amount.
Interest Rates Vary: The rate you input is an estimate. Actual rates depend on your creditworthiness and market conditions.
Loan Term Matters: A longer loan term means lower monthly payments but more interest paid over time. A shorter term means higher payments but less total interest.
Fees and Other Costs: This calculation does not include loan origination fees, closing costs, insurance, or taxes, which can add to the overall cost of borrowing.
Disposable Income: Ensure you leave enough disposable income for unexpected expenses and savings after accounting for all debts.
Always consult with financial institutions and advisors for personalized loan offers and advice.
function calculateAffordability() {
var monthlyIncome = parseFloat(document.getElementById("monthlyIncome").value);
var currentDebts = parseFloat(document.getElementById("currentDebts").value);
var annualInterestRate = parseFloat(document.getElementById("interestRate").value);
var loanTermMonths = parseInt(document.getElementById("loanTermMonths").value);
var resultValueElement = document.getElementById("result-value");
// Clear previous error messages or results
resultValueElement.textContent = "$0.00";
// Input validation
if (isNaN(monthlyIncome) || monthlyIncome <= 0) {
alert("Please enter a valid positive number for Monthly Income.");
return;
}
if (isNaN(currentDebts) || currentDebts < 0) {
alert("Please enter a valid non-negative number for Existing Monthly Debt Payments.");
return;
}
if (isNaN(annualInterestRate) || annualInterestRate <= 0) {
alert("Please enter a valid positive number for the Annual Interest Rate.");
return;
}
if (isNaN(loanTermMonths) || loanTermMonths <= 0) {
alert("Please enter a valid positive number for the Loan Term in Months.");
return;
}
// Step 1: Calculate Available Monthly Income for New Debt
var availableIncome = monthlyIncome – currentDebts;
if (availableIncome 0) {
// P = M * [ (1+r)^n – 1 ] / [ r * (1+r)^n ]
var numerator = Math.pow(1 + monthlyInterestRate, loanTermMonths) – 1;
var denominator = monthlyInterestRate * Math.pow(1 + monthlyInterestRate, loanTermMonths);
principal = maxMonthlyPayment * (numerator / denominator);
} else {
// If interest rate is 0, P = M * n
principal = maxMonthlyPayment * loanTermMonths;
}
// Format the result to two decimal places
resultValueElement.textContent = "$" + principal.toFixed(2);
}