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.