It is the maximum amount of money in which a person can borrow without jeopardizing their financial stability.
Personal finance experts establish that the total limit of borrowing capacity is between 20% and 30%, depending on your expenses.
Limit spending and prevent debts from exceeding you
In addition to serving to limit spending and prevent debts from exceeding you, you can calculate your ability to pay to know how much money you can borrow from a financial institution.
However, the institution will be the one that calculates your borrowing capacity and decides the credit limit, since it also takes into consideration other aspects such as having constant income and your payment history. You may be denied a loan or assigned a lower amount than what you are asking for.
The formula for calculating borrowing capacity
The mathematical formula for calculating the monthly borrowing capacity is relatively easy to estimate, since it is the result of subtracting fixed and variable expenses from our total income.
Debt capacity = (Total income – Fixed and variable expenses) x 0.20.
Total income: contemplate your salary; investment returns; additional work payments; the rent of your car like Uber or rent for example of a room of your apartment in Airbnb; or any other additional income.
Fixed expenses : are those that you invariably have every month as food, gas, transportation, services such as telephone and internet, rent, the payment of debts that you already have on your credit card or if you have an automotive or mortgage credit, among others.
Variable expenses: those that are presented bimonthly, semi-annually or annually as several services of your home (water, electricity, property, if you have your own home), clothing, insurance, among others.
Each person has different expenses, they vary if you are single, married or if you have children. So make a detailed list of all the expenses you can incur during the payment of your credits or loans. You can use a budget calculator to know what amount you should allocate to your biggest expenses.