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Loan Eligibility Formula:
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The loan eligibility calculation determines how much you can borrow based on your income, affordable payment, interest rate, and loan term. It helps borrowers understand their borrowing capacity before applying for loans.
The calculator uses the present value of an annuity formula:
Where:
Explanation: The formula calculates the maximum loan amount you can afford based on what you can pay monthly, accounting for interest and loan duration.
Details: Lenders typically use the 28/36 rule - housing payment shouldn't exceed 28% of gross monthly income, and total debt payments shouldn't exceed 36%. This calculator helps you stay within these guidelines.
Tips: Enter your comfortable monthly payment, current interest rates, desired loan term, and annual salary. The calculator will show your maximum loan amount and whether the payment fits standard affordability ratios.
Q1: What percentage of my income should go to loan payments?
A: Most lenders recommend keeping housing payments below 28% of gross monthly income and total debt payments below 36%.
Q2: How does loan term affect the amount I can borrow?
A: Longer terms allow borrowing more (smaller monthly payments) but cost more in total interest. Shorter terms mean higher payments but less interest overall.
Q3: Why does the calculator show 'Payment exceeds 28% of monthly income'?
A: This means your entered payment would be more than 28% of your monthly gross income, which most lenders consider too high.
Q4: Should I borrow the maximum amount calculated?
A: Not necessarily. Consider your other financial obligations, emergency savings, and future income stability before borrowing.
Q5: Does this include taxes and insurance?
A: This calculator focuses on principal and interest only. For mortgages, remember to account for property taxes and insurance in your total housing payment.