Debt Service

Debt service is a measure of the ongoing cost of carrying debt. For an individual, it includes the monthly payments on mortgages, car loans, student loans and credit cards. For a company or government, it includes interest payments plus any scheduled repayments of loans and bonds.

For example, a company with annual interest payments of 3 million and loan repayments of 5 million due this year has debt service of 8 million for the year.

Lenders look closely at whether a borrower can comfortably afford its debt service. For companies and property investors, a common measure is the debt service coverage ratio, which compares the cash available to pay debts with the payments due. For households, lenders often look at what share of monthly income goes towards debt payments.

If debt service becomes too large relative to income, borrowers may struggle to make payments, leading to missed payments, default or the need to restructure their debts. Rising interest rates can quickly increase debt service on variable-rate borrowing.