How to Calculate Debt Service
Debt service is the amount owed by the borrower as payment for the principal amount and interest of the debt. Monthly mortgage payment is one of the many types of debt service.
As it involves money, it is necessary to know how to calculate debt service.
In any kind of loan scheme there is always debt service associated. This is one aspect of obtaining loan that should be given due attention. Before signing the fine print it is important to know first how the debt service is calculated so that you will determine how much you owed. In calculating the amount owed for the debt service it uses debt service ratio to measure the debt load and the indicator if whether the borrower is able to repay the debts in monthly payments.
Debt ratio is use in calculating the amount owed by the company according to the value of the assets. It is a tool used to determine the ability of the company to repay the debt in a long term. In order to calculate the debt ratio it is important to have access with the balance sheet. The balance sheet will show the amount of debt that the company owes as well as the current value of the company’s assets. You can determine the debt ratio by dividing the total debt with the total assets. Thus, the company would greatly rely on credit in order to operate if the result of the debt ratio is higher. If the result of the debt ratio is greater it would mean that the company’s assets are lower than the debt.
The drawback of having higher debt ratio is that there would be greater risk for a default of loan. In this sense, it would be risky in the part of the lender. That is why the company is forced to pay higher interest rates when applying for loan. In like manner, the company will find difficulty in borrowing money if the debt ratio is higher. In this case, the lender would require additional assets from the company. Calculating the debt ratio is difficult that is why it is necessary to hire a professional to do the job. However, having all the records needed would make the computation easier and more accurate.
That is why if you are planning to apply for loan see to it that you should avoid having higher debt ratio. Ensure to keep and maintain your assets by repaying your debt promptly before it gets higher. This would not only for the sake of your assets but also for your company. In this way, it would be better to think many times before getting loan if you know that you do not have enough resources to repay it. Otherwise, it would only damage your assets as well as your company.
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