Definition§
Annual Debt Service (ADS) is the total amount of principal and interest payments that are required to be paid over the course of a year to repay a loan. It is commonly used in loan agreements and financial analyses to measure the money needed to fulfill debt obligations.
Examples§
Example 1:§
Loan Details:§
- Loan Amount: $100,000
- Interest Rate: 4% annually
- Term: 25 years (300 months)
- Monthly Payment: $527.84 (calculated using amortization formula)
Calculation:§
The Annual Debt Service is calculated by summing up the monthly payments over 12 months. \[ \text{Annual Debt Service} = 12 \times \text{Monthly Payment} = 12 \times 527.84 = $6,334.08 \]
Example 2:§
Loan Details:§
- Loan Amount: $200,000
- Interest Rate: 5% annually
- Term: 30 years (360 months)
- Monthly Payment: $1,073.64 (calculated using amortization formula)
Calculation:§
\[ \text{Annual Debt Service} = 12 \times \text{Monthly Payment} = 12 \times 1073.64 = $12,883.68 \]
Frequently Asked Questions (FAQs)§
What is the importance of knowing Annual Debt Service?§
Knowing the Annual Debt Service is crucial for budgeting and financial planning. It ensures that there are sufficient funds available to cover debt obligations and helps in assessing the viability of current or prospective loans.
How is the Annual Debt Service calculated?§
The Annual Debt Service is calculated by multiplying the monthly loan payment by 12. Monthly payments are determined using the loan’s principal amount, interest rate, and term.
What factors affect the Annual Debt Service amount?§
The amount of the Annual Debt Service depends on the loan principal, interest rate, and loan term. Longer terms generally reduce the monthly payment but increase the total interest paid and potentially the annual debt service.
How does changing the interest rate impact the Annual Debt Service?§
An increase in the interest rate will raise the monthly payment, thereby increasing the Annual Debt Service, while a decrease in the interest rate will have the opposite effect.
Related Terms§
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Principal: The amount borrowed in a loan, which doesn’t include interest.
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Interest: The charge for borrowing money, generally expressed as an annual percentage of the loan’s principal.
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Amortization: The process of spreading out a loan into a series of fixed payments over time.
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Debt Service Coverage Ratio (DSCR): A financial metric used to assess an entity’s ability to use its operating income to cover its debt and interest obligations.
Online Resources§
References§
- Brueggeman, William B., and Jeffrey D. Fisher. “Real Estate Finance and Investments.” McGraw Hill, 2019.
- Geltner, David, et al. “Commercial Real Estate Analysis and Investments.” OnCourse Learning, 2018.
Suggested Books for Further Study§
- “The Real Estate Investor’s Handbook: The Complete Guide for the Individual Investor” by Steven D. Fisher.
- “Principles of Real Estate Practice” by Stephen Mettling and David Cusic.
- “Real Estate Finance & Investments” by Jeffrey Fisher and William Brueggeman.
