Understanding Borrowing Power

Your "borrowing power" refers to the amount of money a lender is likely willing to lend you. It's a key factor when you're considering taking out a loan, such as a mortgage, personal loan, or auto loan.

Key Factor: Debt-to-Income (DTI) Ratio

One of the primary metrics lenders use is the Debt-to-Income (DTI) ratio. It compares your total monthly debt payments to your gross monthly income (income before taxes and other deductions).

DTI Ratio (%) = (Total Monthly Debt Payments / Gross Monthly Income) * 100

In some regions, like India, a similar concept called FOIR (Fixed Obligation to Income Ratio) is used, which also considers other fixed obligations.

• Lower DTI is Better: A lower DTI ratio indicates a good balance between debt and income, suggesting to lenders that you can comfortably manage more debt.
• Lender Limits: Lenders have maximum DTI ratios they will accept. This tool allows you to set a "Target DTI Ratio" for estimation. Commonly, lenders might look for a DTI around 36% to 43%, but this can go up to 50% or even higher (e.g., 50-55% FOIR in India for certain loans/lenders) depending on the lender, loan type, and your overall financial profile.

This calculator uses your target DTI to estimate how much "room" you have for an additional monthly loan payment, and then calculates a potential loan principal from that.

Other Factors Lenders Consider (Not used by this simplified tool):

While DTI is important, lenders look at a broader picture:

• Credit Score: A history of responsible credit use (e.g., CIBIL score in India, FICO score in the US). A higher score generally means better loan terms and potentially higher borrowing power.
• Income Stability & Employment History: Lenders want to see a stable and reliable source of income.
• Loan-to-Value (LTV) Ratio: For secured loans like mortgages, this compares the loan amount to the appraised value of the property. Lenders usually require a down payment, limiting the LTV (e.g., 80% LTV means 20% down payment).
• Savings & Assets: Having savings or other assets can demonstrate financial stability.
• Type of Loan & Loan Purpose: Different loans have different risk profiles and criteria.
• Prevailing Interest Rates: Market interest rates affect the affordability of loan payments.

How Interest Rates & Loan Term Impact Borrowing Power:

For a given affordable monthly payment:

• A **lower interest rate** allows you to borrow a larger principal amount.
• A **longer loan term** (more years to repay) also allows you to borrow a larger principal amount, though you'll likely pay more total interest over the life of the loan.

This Tool Provides an Estimate: The calculations here are based on the DTI ratio and loan terms you provide. It offers a general idea of potential loan affordability. It is **NOT a loan pre-approval, loan offer, or a guarantee of credit.** Your actual borrowing power will be determined by a lender after a full application and underwriting process that considers all relevant factors.