debtservicing

Debt servicing, also known as debt service, is the cash flow required to meet the periodic payments on a debt, including both interest and principal. It applies to individuals, corporations, and governments and covers loans, bonds, and other forms of credit. For a loan, debt service consists of regular payments due according to the amortization schedule; for a fixed-rate bond, it comprises periodic coupon payments and the repayment of principal at maturity.

In accounting and finance, debt service is a key component of cash flow analysis. A common measure is the debt service coverage ratio (DSCR), which compares operating earnings to debt service obligations to assess the ability to meet payments. For households, related notions include debt service to income, while for governments, debt service to revenue or to expenditures is used to evaluate affordability.

Factors affecting debt service include the level of interest rates, the terms of the loan or bond (maturity, amortization), currency risk, and the availability of refinancing. When rates rise or maturities shorten, annual debt service obligations typically increase, potentially stressing cash flow. Refinancing or extending maturities can reduce payments but may raise the total cost or introduce penalties.

Debt servicing is central to debt management and credit risk. A high or rising debt service burden can constrain discretionary spending, investment, and fiscal or financial flexibility; it may also affect credit ratings and access to new financing. Conversely, prudent debt servicing supports sustainability and smoother capital planning.