The maximum amount you can afford to borrow depends on three things: the interest rate of the home or car loan, the length of the loan period, and how much you can afford to pay each month. If you are looking for auto loans, or home loans, use the steps below to compute how much you should borrow.
Instructions
- 1
Divide the annual interest rate by 12 and call the number "R," and call the number of months in the loan period "M." Now compute the following fraction:
(1+R)^M - 1
------------------
R(1+R)^M
Multiply the number you obtained in Step 1 by the amount of monthly payment you can afford to make each month. The resulting answer is the amount of money you should borrow.
3Use the formula above with the following example: annual interest rate of 4.5%, 7 year loan period, and $350 per month. So, R = .045/12 = .00375 and M = 84. And then,
(1.00375)^84 - 1
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(.00375)(1.00375)^84
equals .36945/.005135 = .36945/.005135 = 71.947.
Now multiply that by $350, the amount of the monthly loan payments. So (350)(71.947) = $25181. This means that you can afford to borrow $25181 for a home or auto loan.
4If you don't know the precise interest rate, test the formula with a range of values for R. All things being equal, the higher the value of R, the less you can afford to borrow. The lower the interest rate you can secure, the larger the loan you can take out.
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