An individual’s debt service might include a mortgage and student loans. Debt service for companies includes the principal and the interest on outstanding loans. An individual or company that cannot afford to make the payments is said to be “unable to service the debt. ”
In this formula, A = amount per month, P = principal (loan amount), r = interest rate per period and n = total number of payments. [2] X Research source For example, suppose you purchased a $21,000 car and you put down a $1,000 down payment. You need to borrow $20,000, so you take out a 60-month loan at an annual interest rate of 7. 5 percent. Calculate the interest rate per period (month) by dividing 7. 5/12 = 0. 625 percent per month. Plug in the values to the formula: A=[. 625(1+. 625)60]/[1+. 625)60−1]{\displaystyle A={[. 625(1+. 625)^{60}]/[1+. 625)^{60-1}]}}. In this example, the total monthly payment would be $400. 76.
For example, suppose in addition to the car loan for $400. 76 per month, you have a mortgage payment for $823. 45 per month and a student loan payment of $147. 89 per month. Your total debt service payments would be $400. 76 + $823. 45 + $147. 89 = $1,372. 10.
Short-term debt is any debt that is due in less than one year. [4] X Research source The current portion of long-term debt is the total amount of long-term debt that must be paid in the current year. [5] X Research source Businesses do not report debt service on financial statements. It may be reported in the notes on a financial statement. [6] X Research source
Term out means that the line of credit is converted to an amortizing loan. [12] X Research source An amortizing loan means the balance of the loan is reduced over time by monthly payments that include principal and interest. [13] X Research source
Make this adjustment by using this formula: interest + (principal / [1 – tax rate]). For example, suppose a business pays income taxes at a rate of 34 percent, and has a 5-year loan for $50,000 with 6. 0 percent interest. This year, the company will pay $8,840 towards the principal and $2,760 in interest. Calculate the debt service with the above formula, using the equation $2,760 + ($8,840 / [1 - . 34]) = $2,760 + $13,394 = $16, 154.
Operating expenses are those expenditures businesses incur as a result of running the business. They include employee wages and funds dedicated to research and development. [18] X Research source
The DSCR is calculated with the equation $500,000 / $440,000 = 1. 14. The rental company generates 14 percent more income than they need to service their debts.
If the DSCR is greater than 1, then the company or individual has enough cash to service the debt. If the DSCR is less than 1, then there is not sufficient cash to service the debt. For example, a DSCR of . 87 means that the individual or business only has enough cash to pay 87 percent of the interest and principal on debt for that year. The borrower would have to draw from savings or borrow more to service the debt. Some creditors may require debtors to keep their DSCR above a minimum threshold while the loan is outstanding. Most creditors will require a ratio of 2 or more before granting any new debt.
