Personal Loan Affordability Calculator: Understanding Your Borrowing Capacity

What is a Personal Loan Affordability Calculator?

A personal loan affordability calculator is a financial tool that helps you estimate the maximum loan amount you can afford based on your monthly budget for loan repayments (EMI), the interest rate, and the loan term. It's an essential tool for financial planning and responsible borrowing.

The Personal Loan Affordability Formula

The formula used to calculate the maximum affordable loan amount is:

\[L = P\frac{1 - (1 + r)^{-n}}{r}\]

Where:

• \(L\) = Maximum loan amount
• \(P\) = Monthly EMI (Equated Monthly Installment)
• \(r\) = Monthly interest rate (annual rate divided by 12)
• \(n\) = Total number of months in the loan term

Step-by-Step Calculation Process

1. Calculate the monthly interest rate: \[r = \frac{\text{Annual Interest Rate}}{12}\]
2. Apply the formula to calculate the maximum loan amount.
3. Calculate total payment: \[\text{Total Payment} = \text{Monthly EMI} \times \text{Number of Months}\]
4. Calculate total interest: \[\text{Total Interest} = \text{Total Payment} - \text{Maximum Loan Amount}\]

Example Calculation

Let's calculate the maximum affordable loan amount for a monthly EMI budget of $500, an interest rate of 8% per year, and a loan term of 5 years:

1. \(r = \frac{8\%}{12} = 0.00667\)
2. \(L = 500 \times \frac{1 - (1 + 0.00667)^{-60}}{0.00667} = 25,730.26\)
3. Total Payment = $500 × 60 = $30,000
4. Total Interest = $30,000 - $25,730.26 = $4,269.74

Visual Representation

The green portion represents the principal ($25,730.26), while the red portion shows the total interest ($4,269.74) over the life of the personal loan.