Debt service is the term used for the amount of money needed to repay both the principal amount and interest of a loan over a period of time.
One example of debt service is the payment of mortgage on a monthly basis.
A company’s debt service coverage ratio is the calculation of the available funds for debt servicing. This is often used in the context of corporate finance, as well as real estate finance.
To compute for this figure, one must take the projected net operating income and divide it by the amount for debt service. A company with the ability to meet its debt obligations has a debt service coverage ratio of 1 or higher.
Conversely, a ratio lower than 1 is a clear indication of a company’s inability to cover its debt servicing. Therefore, this information is one of the main considerations of lending institutions before a loan application is approved; the higher the ratio is, the easier it generally will be for the company to be granted a loan.
Debt service coverage ratio may also be computed for individuals. Banks use this for the same purpose: to determine a person’s ability to repay a loan.
For individuals or companies who are struggling to repay debts, debt management may be a necessary option. Under debt management, a third party steps in to help the debtor manage the repayment of his debts. The third party could propose a more realistic payment scheme.
People who have been mired in much debt and are having difficulty taking control of their situation may find credit counseling useful. They are assisted in finding ways of minimizing their expenses and ensuring that they do not spend more than they are actually able to pay for.
