What is debt service?

Debt service refers to the amount of money that is required to pay off the principal and the interest on a loan or an outstanding debt. This can apply to government institutions, businesses, and individuals. Debt service may include monthly payments, interest payments, and the total cost of borrowing over the life of the debt.

Lenders primarily use debt service ratios to evaluate the borrower's ability to repay the loan. These ratios typically compare the borrower's income to their debt obligations, providing an insight into whether they can feasibly meet their debt service obligations.

Debt service is crucial as it affects creditworthiness, interest rate, and borrowing capacity. Inability to meet debt obligations can lead to default and bankruptcy, impacting the credit score of the borrower and significantly damaging their financial wellbeing.

In summary, debt service is essential for sustainable finance, and it is a critical parameter to measure creditworthiness and financial wellbeing.