1. What is the Borrowing Power Formula?

The borrowing power formula calculates the maximum loan amount (principal) you can afford based on your comfortable monthly payment, interest rate, and loan term. It helps determine how much you can borrow while maintaining affordable repayments.

2. How Does the Calculator Work?

The calculator uses the borrowing power formula:

Where:

• \( P \) — Maximum loan amount (principal, USD)
• \( PMT \) — Affordable monthly payment (USD)
• \( r \) — Monthly interest rate (annual rate ÷ 12, as decimal)
• \( n \) — Loan term in months

Explanation: The formula calculates the present value of an annuity (series of equal payments) considering the interest rate and time period.

3. Importance of Borrowing Power Calculation

Details: Knowing your borrowing power helps you budget effectively, avoid over-commitment, and negotiate better loan terms with lenders.

4. Using the Calculator

Tips: Enter your comfortable monthly payment, annual interest rate, and desired loan term in months. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a realistic monthly payment amount?
A: Typically no more than 30-35% of your monthly take-home income, after accounting for other debts and expenses.

Q2: How does interest rate affect borrowing power?
A: Higher rates reduce borrowing power as more of each payment goes toward interest rather than principal.

Q3: What's better - shorter term with higher payments or longer term with lower payments?
A: Shorter terms mean less total interest paid but higher monthly payments. Choose based on your cash flow and financial goals.

Q4: Does this include fees and charges?
A: No, this calculates principal only. Actual loan amount may be less due to origination fees or other charges.

Q5: How accurate is this calculator?
A: It provides a good estimate, but actual loan offers may vary based on credit score, lender policies, and other factors.