Understanding debt service, principal, and interest

The simple version

When a municipality finances a project (through a bond, a loan, or an installment purchase), the yearly cost of paying that back is called debt service. It's made up of two parts:

• Principal -- the actual amount borrowed, being paid back.
• Interest -- the cost of borrowing it, paid on top of the principal.

Other terms you'll see

• Interest rate -- the percentage used to calculate interest. A lower rate means a lower cost to borrow.
• Term (or maturity) -- how many years the financing lasts. A longer term usually means lower annual payments but more total interest paid.
• Tax-exempt vs. taxable financing -- in many cases, interest on municipal financing can be exempt from certain taxes for the lender, which can translate into a lower rate for the borrower -- whether that applies depends on real tax rules, not something Capital Command determines.

Why it matters to your department

Capital Command's financing calculators let you try different terms and rates to see how the estimated annual payment changes -- useful for comparing options before you talk to your finance team, but every number is a planning estimate, not a financing quote.

Who should I talk to?

Your finance director/administrator for how a new debt payment fits your budget; a municipal advisor or lender for what rate and term you would actually qualify for.

--- *Capital Command is not a financial advisor, underwriter, bond counsel, or lender. Nothing here is a financing recommendation, tax determination, or legal advice.*