Loan Affordability Calculator: Maximize Your Borrowing Potential

How to use the tool

1. Type your annual income: e.g., $68,500 or $112,000. Include bonuses or freelance earnings.
2. Add your annual expenses: e.g., $41,200 or $57,300. Count rent, insurance, credit-card payments, etc.
3. Set the loan term (months): e.g., 48 or 72. Longer terms lower each instalment but increase total interest.
4. Enter the annual interest rate %: e.g., 4.8 % or 6.2 %. Use the rate in your loan offer or a current market average.
5. Hit “Calculate”: the tool shows the maximum principal you can afford.

Behind the scenes: the formula

The calculator converts everything to monthly figures and applies the standard amortisation formula:

$$ \text{Max Loan} = rac{(\text{Income}/12 – \text{Expenses}/12)\,[1-(1+r)^{-n}]}{r} $$

• r = monthly rate = annual rate ÷ 12 ÷ 100.
• n = loan term in months.

Example 1

• Income $68,500 ⇒ monthly $5,708
• Expenses $41,200 ⇒ monthly $3,433
• Disposable $2,275
• Term 48 mo, rate 4.8 % ⇒ r = 0.004
• Loan factor = 1-(1+0.004)^-48 = 0.171
• Max Loan = $2,275 × 0.171 ÷ 0.004 ≈ $97,200

Example 2

• Income $112,000 ⇒ monthly $9,333
• Expenses $57,300 ⇒ monthly $4,775
• Disposable $4,558
• Term 72 mo, rate 6.2 % ⇒ r = 0.00517
• Loan factor = 1-(1+0.00517)^-72 = 0.299
• Max Loan = $4,558 × 0.299 ÷ 0.00517 ≈ $263,600

Quick-Facts

• Typical lender debt-to-income limit: 36 % (CFPB “DTI Ratio”, 2022).
• Average 30-year fixed mortgage rate 2023: 6.6 % (Freddie Mac PMMS, 2023).
• Federal student loan cap for undergraduates: $57,500 (U.S. Dept. of Education, 2023).
• Auto loan average term: 68 months (Experian “State of the Auto Finance Market”, 2023).

FAQ

How does the calculator differ from a lender’s approval?

It uses only your income, expenses, term, and rate. Lenders also pull credit reports, verify assets, and may add a stress-test margin (Fannie Mae Selling Guide, 2023).

Why exclude my credit score in the math?

Credit affects pricing, not your cash-flow capacity. Use a realistic rate for your score to keep the estimate meaningful (Equifax Credit Score FAQs, 2023).

What interest rate should I enter?

Insert the annual APR quoted by your lender or a market average—Freddie Mac updates a weekly survey you can reference (Freddie Mac PMMS, 2023).

Can self-employed income be used?

Yes. Average your last two years’ net income and enter that figure, mirroring lender practice (IRS Pub. 334, 2023).

How often should I recalculate affordability?

Recalculate whenever your income, expenses, or rate changes by more than 5 % to stay accurate (CFPB Budgeting Toolkit, 2022).

What happens if the formula returns $0?

Your expenses fully absorb disposable income. Trim costs or lengthen the term to improve affordability (National Foundation for Credit Counseling, 2023).