The Borrowing Capacity Calculator helps individuals, businesses, and lenders determine the maximum amount of money a borrower can qualify to borrow based on their income, debt obligations, and other financial factors. This tool plays a vital role in assessing how much financing is accessible, whether for personal loans, mortgages, or business funding. By evaluating net income, existing debt payments, and the debt service coverage ratio (DSCR), the calculator provides an estimate of the total borrowing capacity.
Lenders typically use this calculator to assess creditworthiness and to ensure that borrowers can repay the loan without compromising their financial stability. It simplifies the borrowing process, providing a clear picture of what is affordable based on an individual’s or business’s financial health.
Formula of Borrowing Capacity Calculator
To calculate borrowing capacity, the following formula is used:
Borrowing Capacity (BC) = (Net Income (NI) × Debt Service Coverage Ratio (DSCR)) ÷ Total Debt Payments (TDP)
Variables:
- BC: Borrowing Capacity, the maximum amount a borrower can qualify to borrow.
- NI: Net Income, the income or earnings before taxes and other deductions (usually monthly or annually).
- DSCR: Debt Service Coverage Ratio, a financial ratio used by lenders to assess a borrower's ability to repay the loan. A typical DSCR is between 1.2 and 1.5, meaning a borrower should have 20% to 50% more income than required to cover debt payments.
- TDP: Total Debt Payments, the borrower’s total monthly debt obligations, including existing loans, credit cards, and other financial liabilities.
Key Points:
- Net Income (NI) is the amount of money remaining after all taxes, operating expenses, and deductions. It serves as the borrower’s capacity to repay a loan.
- Debt Service Coverage Ratio (DSCR) is a critical metric that lenders use to ensure the borrower has sufficient income to cover loan payments, leaving a margin for financial stability.
- Total Debt Payments (TDP) include all existing financial obligations. Calculating these payments is essential in determining how much additional debt the borrower can afford.
Common Terms and Reference Table
Here’s a table with common financial terms that borrowers often search for when calculating borrowing capacity:
| Term | Definition |
|---|---|
| Net Income (NI) | The total income after taxes and deductions, available for loan repayment. |
| Debt Service Coverage Ratio (DSCR) | A ratio that determines a borrower's ability to cover debt payments. |
| Total Debt Payments (TDP) | The sum of all existing financial obligations, including loans and credit. |
| Borrowing Capacity (BC) | The maximum loan amount a borrower can qualify for based on their financials. |
| Principal and Interest | The main components of debt payments: the loan amount (principal) and the interest charged by the lender. |
This table helps users familiarize themselves with essential terms that are key to understanding their borrowing capacity and how lenders assess loan applications.
Example of Borrowing Capacity Calculator
Let’s go through an example to demonstrate how the Borrowing Capacity Calculator works.
Assume an individual earns $100,000 annually in net income (NI), has a debt service coverage ratio (DSCR) of 1.3 (which means the borrower should have 30% more income than needed to cover debt payments), and has total debt payments (TDP) of $20,000 annually.
Step 1: Apply the Formula
Borrowing Capacity (BC) = (Net Income (NI) × Debt Service Coverage Ratio (DSCR)) ÷ Total Debt Payments (TDP)
Substituting the values:
BC = ($100,000 × 1.3) ÷ $20,000
Step 2: Calculation
BC = $130,000 ÷ $20,000 = 6.5
The borrowing capacity is 6.5 times the total debt payments, meaning this individual could qualify for a loan up to $130,000, depending on the lender’s assessment.
Most Common FAQs
The DSCR is a measure of how much extra income a borrower has to cover loan payments. A higher DSCR means more income is available beyond what is needed to repay existing debts, leading to higher borrowing capacity. Lenders typically require a DSCR of 1.2 or higher to ensure the borrower can comfortably repay the loan.
This calculator is commonly used for mortgages, personal loans, and business loans. It provides lenders with a clear picture of how much a borrower can reasonably afford to borrow based on their income and debt load.
Existing debts reduce the amount of income available to cover additional loan payments. When calculating borrowing capacity, lenders account for the total debt payments, which includes car loans, credit card balances, mortgages, and any other outstanding liabilities. The higher the total debt payments, the lower the borrowing capacity.