Debt Service

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Definition of 'Debt Service'

Debt service is the amount of money a borrower pays each month to service a debt, including principal and interest. It is calculated by multiplying the principal balance by the interest rate and dividing by the number of payments per year. For example, if you have a loan balance of \$100,000 with an interest rate of 5% and you make monthly payments, your monthly debt service would be \$500.

Debt service is an important factor to consider when taking on debt, as it can have a significant impact on your monthly budget. It is important to make sure that you can afford the monthly payments before you take on any debt.

There are a few different ways to calculate debt service. The most common method is to use the following formula:

```
Monthly Debt Service = Principal Balance * Interest Rate / Number of Payments per Year
```

For example, if you have a loan balance of \$100,000 with an interest rate of 5% and you make monthly payments, your monthly debt service would be \$500.

Another way to calculate debt service is to use the following formula:

```
Monthly Debt Service = Principal Balance * Monthly Interest Rate
```

For example, if you have a loan balance of \$100,000 with an interest rate of 5%, your monthly interest rate would be 0.05 / 12 = 0.00417. Your monthly debt service would then be \$100,000 * 0.00417 = \$417.

The final way to calculate debt service is to use the following formula:

```
Monthly Debt Service = Principal Balance * (1 + Interest Rate) ^ Number of Payments - 1
```

For example, if you have a loan balance of \$100,000 with an interest rate of 5% and you make monthly payments, your monthly debt service would be \$416.67.

Which method you use to calculate debt service is up to you. However, it is important to use the same method consistently so that you can compare different loans and make informed decisions about your debt.

Debt service is an important factor to consider when taking on debt, as it can have a significant impact on your monthly budget. It is important to make sure that you can afford the monthly payments before you take on any debt.

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