Debt service is the amount of cash needed to pay for the periodic interest and principal repayment associated with a loan. The debt service amount is typically calculated for a standard time period, such as for a month, quarter, or year.
The debt service concept is applied to debt arrangements where there is a fixed repayment schedule, as is usually the case for a mortgage, bond, or long-term loan. The term is less applicable to a line of credit, where the amount repaid can vary considerably from month to month.
The debt service level is closely examined by both a prospective lender and borrower before entering into a lending arrangement, in order to model whether the cash flows of the borrower will be able to support the scheduled debt payments.
The debt service concept can apply to the total amount of interest and principal payments associated with all currently outstanding loans (trade accounts payable are not included in the calculation). This variation is used to evaluate the cash payouts associated with all debt, and is particularly useful when examining whether an entity can support a layer of additional debt.