What is Debt Service?

//What is Debt Service?
What is Debt Service? 2017-10-02T18:54:50+00:00

Definition: Debt service is the amount of money required in a given period to pay for the interest expense and principal of an existing loan. To put it more simply, it is the amount of money a person agreed to pay for a number of periods during the lifetime of a loan.

What Does Debt Service Mean?

What is the definition of debt service? Debt service is a term that is normally employed in the financial industry to define the amount of both principal and interest that a given company has to pay to their creditors, either a bank or bondholder. This concept also applies to individuals, since they are also exposed to loans such as auto loans, credit cards, home mortgages and many others.

Whenever you receive a credit card statement, there’s probably a minimum payment that has to be made in order to remain solvent; this payment includes both principal and interest expense. This is considered the debt servicing of the credit card. Also, the debt servicing concept is used to determine the actual amount that a company or an individual pays to their creditors regularly. By reviewing the debt servicing figure, an analyst can assess how liquid a company is and how able it is to meet its short-term and long-term obligations.

Let’s illustrate this with an example.

Example

Mr. and Mrs. Bold decided to apply for a mortgage to buy their first house. They went to US Bank to discuss the details of the loan and asked the bank’s representative to tell them how much they will pay each month. The representative informed them that they would have a monthly payment of $450 for the next 25 years.

This means that they will pay a total of $450 each month to service their mortgage. As we previously discussed, this amount includes both principal and interest payment.

Summary Definition

Define Debt Servicing: Debt service means the total principal and interest payment require to meet ongoing loan payments and financing requirements.