A Sample Loan Ability Calculator!

A Sample Loan Ability Calculator!

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Cladfy Blog
Jun 13, 2023·

3 min read

Table of contents

What is a loan ability calculator?

  1. An ability calculator is a tool to help estimate the amount of loan to be approved.

  2. The calculator does not take into account an applicant’s credit score or other factors that may affect the ability to get the loan.

  3. The calculator is based on the provided information and the results may be inaccurate if make were made mistakes during input.

The client is expected to provide supporting documents that illustrate:

  • Annual income: Ksh

  • Monthly debt payments: Ksh

  • Other monthly expenses: Ksh

  • Outlier transactions: Ksh

The lender will use certain pre-set parameters to compute the estimated loan amount.

  • Down payment amount: Ksh

  • Loan term: years

  • Interest rate: %

  • Debt-to-income ratio, DTI: %

Here is a brief explanation of each input field:

  • Annual income: This is an applicant's total gross income from all sources.

  • Monthly debt payments: This is the total amount an applicant owes on all of the monthly debts, such as credit cards, car loans, and student loans.

  • Other monthly expenses: This is the total amount an applicant spends on all of the other monthly expenses, such as housing, food, transportation, and entertainment.

  • Down payment amount: This is the amount of money an applicant plans to put down on the loan.

  • Outlier transactions: A financial transaction that is significantly different from the other transactions in a dataset or statement

See - Are outlier transactions omitted?
Outlier transactions are typically omitted during the calculation of the debt-to-income ratio (DTI). This is because outlier transactions are not representative of a borrower's typical financial obligations. For example, a large one-time expense, such as a medical bill or car repair, would be considered an outlier transaction.

See - How DTI works and its effects?
A high DTI can make it difficult for an applicant to get approved for a loan or qualify for a lower interest rate. When calculating DTI, lenders typically only consider recurring monthly debt obligations
Debt-to-income ratio = (Total monthly debt payments) / (Monthly gross income)

Example

An applicant has a monthly gross income of 70,000 Ksh and monthly debt payments of 1000 Ksh

A lender offers a loan with an interest rate of 0f 18%pa and a repayment period of 3 months.

  • To calculate DTI: Divide the monthly debt payments by the gross monthly income.

      DTI = (Monthly debt payments) / (Gross monthly income) = 1000 Ksh / 70,000 Ksh = 1.43%

  • To Calculate your monthly loan payment. This is the amount of money the borrowers will need to pay back each month on a loan.

      Monthly loan payment = (Loan amount) * (Interest rate) / (1 - (1 + Interest rate)^(-Loan period))

Now say the applicant wants to borrow 100,000 Ksh at an interest rate of 18 %pa for a loan period of 3 months, their monthly loan payment would be 3,333.33 Ksh. Calculated as below

Monthly loan payment = (100,000 Ksh) * (0.18) / (1 - (1 + 0.18)^(-3)) = 3,333.33 Ksh
See - Decision Hint!
A common check is to Compare the existing monthly debt payments and the calculated monthly loan payment. If the monthly debt payments are less than or equal to the monthly loan payment, then the applicant is eligible for the loan.

It is important to note that the loan estimate here is suggested and that the actual loan ability may vary depending on individual circumstances that affect both the lender and the applicant.

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