Debt service coverage ratio
What is debt service coverage ratio?
Debt service coverage ratio (DSCR) is the ratio of available cash for debt servicing to principal, interest and lease payments. It's a favoured measurement of a person or business's ability to make a sufficient amount of cash to cover its debt payments.
Where have you heard about debt service coverage ratio?
In 2008 Standard and Poors, a US ratings agency, announced it had lowered its credit rating on a certain grouping of commercial mortgage pass through certificates. This was due to eight specific loans in that particular pool having a debt service coverage ratio of lower than 1.0x.
What you need to know about debt service coverage ratio.
The higher a person or business's ratio the more simple it becomes for them to get a loan because a higher score is indicative of financial strength. Within the limits of personal finance, debt service coverage ratio is used by a bank’s loan officers to work out debt servicing ability. The debt service ratio provides a very helpful indicator of financial durability and helps provide an insight into levels of risk involved. However, just because a loan’s debt service coverage ratio is less than one, doesn't necessarily mean the loan will default.