1. What Is Borrowing Capacity?

Borrowing capacity refers to the maximum amount of money an individual or business can borrow based on their financial situation. It's calculated by considering income, expenses, and a multiplier that represents the lender's risk assessment.

2. How Does The Calculator Work?

The calculator uses the borrowing capacity formula:

Where:

• \( Income \) — Total monthly or annual income ($)
• \( Expenses \) — Total monthly or annual expenses ($)
• \( Multiplier \) — Lender-specific multiplier (dimensionless)

Explanation: The formula calculates disposable income (income minus expenses) and applies a multiplier that varies by lender and borrower's credit profile.

3. Importance Of Calculating Borrowing Capacity

Details: Understanding your borrowing capacity helps in financial planning, loan applications, and making informed decisions about major purchases like homes or vehicles.

4. Using The Calculator

Tips: Enter your income and expenses in the same time period (monthly or annual). The multiplier typically ranges from 3 to 6 for most lenders, but can vary based on individual circumstances.

5. Frequently Asked Questions (FAQ)

Q1: What factors affect the multiplier value?
A: Credit score, employment stability, existing debts, and the type of loan all influence the multiplier value used by lenders.

Q2: Should I use gross or net income?
A: Most lenders use gross income, but some may consider net income. Check with your specific lender for their requirements.

Q3: What expenses should be included?
A: Include all regular expenses such as rent/mortgage, utilities, insurance, loan payments, and living expenses.

Q4: How accurate is this calculation?
A: This provides an estimate. Actual borrowing capacity may vary based on lender policies, credit history, and other factors.

Q5: Can borrowing capacity change over time?
A: Yes, changes in income, expenses, interest rates, or credit score can all affect your borrowing capacity.