Debt is something that affects most Americans in one way or another. MSN reports that 2004 statistics show that about 43 percent of American families spend more than they earn, personal bankruptcies have increased 200 percent from 1994 to 2004 and the average U.S. household has at least $8,000 in credit card debt. It is therefore of vital importance that people educate themselves in debt management and debt terminology.
Debt Service
Debt service is essentially the money required to repay total interest and principal on a debt within a set period of time. If there are tagged on fees, such as an early pay-off fee, and you pay off the debt early, then this fee must be included in what is considered debt service. For example, you may have a personal loan of $1,000 with an interest rate of 5 percent. Your terms are that you must pay $45.94 per month for two years. Since the company will be making a bit more than $100 from interest, the firm wants you to pay off the loan over the two-year period and not repay it immediately. If you follow the terms, your debt service is $1,102.50. If the company has a stipulation that if you pay off the loan early, then you pay a $200 fee, and you want to pay off the loan within a month, your debt service is about $1,200.
Total Debt Service
Two sub-terms ought to be understood to fully understand what debt service is. Total Debt Service (TDS) and Gross Debt Service (GDS) are terms often found when dealing with mortgages, home or car loans. TDS is what percentage of your income is being consumed by monthly obligations and housing expenses, generally gotten from your credit report.
Total Debt Service Example
To put TDS in simple figures, if a person has a salaried income of $1,000 a month and pays $300 rent, $100 food and life expenses, $50 per month payment on one credit card and $50 on a car payment, then his TDS is 50 percent ($300+$100+$50+$50= $500 which is 50 percent of his income).
Gross Debt Service
Gross Debt Service is a part of Total Debt Service. GDS is only the percentage of your income being consumed by housing expenses, meaning rent, principal and interest on a mortgage, property taxes and expenses related to your home. If a person is bringing in $1,000 per month on a salary and $300 includes rent, gas, heat, water and all housing expenses, then her GDS is 30 percent.
How Debt Servicing Is Calculated
Banks and financial institutions have diverse requirements in what they look at when deciding if you are a good candidate for a loan. They may look at your GDS and if your credit is average, only be willing to have your GDS go up to 34 percent. This means that if your salary is $1,000 per month, they will not give you a mortgage where you would have to pay more than $340 per month. The lender may average your GDS and TDS or only consider the higher figure. Independent loan or mortgage specialists are generally able to help you calculate your GDS and TDS, and find a loan that can fit your budget.
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