How to calculate debt service payments
Debt service is the periodic (usually annual) payment of accrued interest and part of the principal amount of the debt. When applying for a loan, companies are required to disclose debt servicing data. Based on the amount of debt service payments and the amount of net income, investors calculate the debt service ratio, which is the percentage of net income that goes to repay the loan.
Method
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Calculating Debt Service Payments
Find out what the cost of debt service is. Debt service cost is a certain amount of money required to pay interest accrued over a certain period and part of the principal amount of the debt. Typically, debt service payments are paid once a year. When applying for a loan, legal entities and individuals are advised to prepare data on the total expenses to cover debts.
An individual can make payments on a mortgage or student loan.
Companies (legal entities) pay the principal amount of the loan and interest on it.
An individual or entity that cannot make debt service payments is insolvent (i.e., unable to service the debt).
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Calculate your monthly debt payments. As a rule, the lender (the person or organization that issued the loan) is responsible for calculating the amount of monthly payments to repay the loan, but you can do it yourself. First, calculate the monthly interest rate; to do this, divide the annual interest rate by 12. Then use the following formula to calculate the amount of monthly payments: {\displaystyle A=P{[r(1+r)^{n}]/[(1+r)^{n}-1 ]}}A=P{[r(1+r)^{n}]/[(1+r)^{n}-1]}.
In the above formula, A is the amount of monthly payments, P is the principal amount of the loan, r is the interest rate for a certain period, n is the total number of payments.
Consider an example. You bought a car for 2,100,000 rubles, while the down payment was 100,000 rubles. Thus, you need to take out a loan in the amount of 2,000,000 rubles. You take a loan at 7.5% per annum for 60 months.
We calculate the monthly interest rate: 7.5/12 = 0.625% (per month).
Substitute these values into the formula above: {\displaystyle A=2000000*{[0.625(1+0.625)^{6}0]/[1+0.625)^{6}0-1]}}A=2000000*{ [0.625(1+0.625)^{6}0]/[1+0.625)^{6}0-1]}.
In our example, monthly loan payments will amount to 40,076 rubles.
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Calculate your total monthly debt payments. In this case, start by calculating the monthly payments for each of your loans. Then add up the resulting values to calculate the total monthly payments. Once you have determined your total debt service payments, you can calculate the debt service ratio.
Let’s say that in addition to a loan to buy a car, you have mortgage and educational loans, the monthly payments for which are 82,345 and 14,789 rubles, respectively.
In our example, the total monthly payments for all loans will be: 40076 + 82345 + 14789 = 137210 rubles.
Method
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Gathering Information to Calculate the Cost of Debt Service
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Determine the cost of debt service. Debt service cost is the total amount used to pay interest and repay part of the principal amount of the debt during the year. In the case of companies (legal entities), the cost of debt service includes interest, debts that must be paid within a year, as well as payments to repay the principal amounts of long-term obligations.
Short-term debt is any debt that must be paid within one year.
The current portion of long-term debt is the portion of long-term debt due in the current year.
In the financial statements of companies, data on the cost of servicing debt is not provided – they are indicated in a note to the financial report.
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Take into account any debt due in the current year. This includes interest and principal, which must be paid within a year. Companies (legal entities) must take into account payments to the redemption fund, which is created as a guarantee of repayment of the bonded loan. Moreover, lease payments that are obligatory for payment in the current year are taken into account.
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When determining the cost of servicing debt, consider the portion of long-term debt that is expiring. The expiring portion of long-term debt is the portion of long-term debt that is due within the next 12 months.[9] Use payments on expiring long-term debt
