Loan Affordability Calculator

When to use it

Most borrowing conversations start from the wrong end: people ask what a bank will lend, rather than what a payment they can live with would support. This page works backwards from a comfortable monthly payment to the loan that payment can carry at a given rate and term.

Use it before viewing homes or cars, to see how a lower rate lifts the limit, or to check what a longer term really buys. The result is arithmetic, not an approval: lenders apply income, debt-ratio and credit rules of their own, and their decision is final.

How the maths works

Loan = payment × (1 − (1 + r)^−n) ÷ r, where r is the annual rate divided by 1,200 and n is the term in years times twelve. It is the mortgage formula rearranged: the same four quantities, solved for the loan instead of the payment. At a zero rate the loan is simply the payment multiplied by the number of months.

The detail lines add the total repaid — payment × n — and the interest, which is that total minus the loan. A longer term raises the loan the payment supports, and raises the interest with it.

A worked example

A payment of 1,200 a month, a 6.5% rate and a 25-year term.

1. Monthly rate: 6.5 ÷ 1,200 = 0.0054167, and n = 300 payments.
2. Discount factor: 1 − 1.0054167^−300 = 0.80225.
3. Loan: 1,200 × 0.80225 ÷ 0.0054167 = 177,723.23.
4. Total repaid: 1,200 × 300 = 360,000, so interest is 182,276.77.

More than half of what leaves your account over 25 years is interest. That is the number worth comparing when a longer term is offered as a kindness.

Payment to loan

Rows four and five show the term effect: the same payment supports about 12,000 more over 30 years than over 25, and costs several thousand more in interest.

Common mistakes

• Using the maximum the bank allows. Start from a payment that survives a bad month, not from the theoretical ceiling.
• Leaving out the extras. For a mortgage, subtract tax and insurance from the payment before entering it.
• Ignoring the rate risk. A variable rate can rise; run the arithmetic at two points higher to see what happens.
• Reading it as approval. The figure says what a payment supports in arithmetic, not what you will be offered.

Keep exploring

• Mortgage Calculator — the same numbers solved for the payment.
• Loan Payment Calculator — the general loan payment calculator.
• Hourly to Salary Calculator — what the payment costs in hours of work.
• Guide: How Loan Payments Work.