Definition - What does Back-End Ratio mean?
Back-end ratio is a financial ratio that is used to evaluate the amount remaining after all debt payments are considered in relation to monthly income.
It is a legal requirement for all
lenders to consider the back-end ratios of potential borrowers prior to
extending credit. The applicant must have a back-end ratio that is equal or
lower to the current requirement for lending in order for the lender to extend
a loan facility. If the ratio is over the given limit, it would be legally
forbidden to allow a new loan to be created.
Justipedia explains Back-End Ratio
Back-end ratio is used to determine
whether or not a person has the financial capability to repay a further loan if
applied for. Federal law dictates that the ratios that must be adhered to and
considered in relation to any loan extension.