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Back-End Ratio

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.

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