Back end ratio is the calculation of the part of the income of an individual or a business that is used to pay the debts. From an individual point of view the monthly debt of an individual include credit card payments, loan payments, home or real estate mortgage, utility bills payments and other payments. The back end ratio is the measure of ability of an individual to pay the loans or other liabilities that are owned by the borrower. In financial world the third party credit issuing companies, lenders and other financial institutions analyze the back end ratio of an individual or a business before making any decision regarding the approval of the loan of that person. The formula of the back end ratio can be shown as under:-
Back End Ratio = (Total Debt Expense per Month / Total Monthly Income) x 100
Another name given to back end ratio is debt to income ratio. For example say an individual has a monthly income of 10,000 dollars per month or 100,000 dollars per annum and the monthly debt that are to be paid are 2,000 dollars. The back end ratio can be calculated as under:-
Back End Ratio = (2,000/ 10,000) x 100
Back End Ratio = 20 Percent
In financial industry a good back end ratio is considered to be good which is less than 36 percent however few lenders can lend the borrowers even if they have a back end ratio of 36 percent.
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