A loan payoff statement is a lender-reported document that provides an amount that will satisfy the current loan principal balance plus any accrued interest, penalties and fees associated with the outstanding loan.
As each loan payment is made on typical installment loans, the payment includes a portion that is applied to the principal balance, as well as an amount owed to the lender in the form of interest. Interest charges accrue on outstanding loans daily, and the accruing interest is normally paid on the following due date of loan payment.
For example, if a loan payment is made on the first of the month and there were 30 days in the previous month, the monthly payment will include 30 days of interest (calculated on the current principal) plus an amount toward the outstanding loan balance. This pattern will continue to occur until the loan is ultimately paid off.
However, a loan payoff means the outstanding loan is being paid off early – usually by way of a cash payment or a refinancing of the outstanding loan with a brand new loan.
The loan payoff amount will include the outstanding principal balance plus the daily accrual interest. If the loan is to be paid off on the 15th of the month then the payoff would include 15 days of accrued interest charges. Similarly, if the loan is to be paid off on the 20th of the month the payoff would include 20 days of accrued interest.
Most lenders simply calculate a daily interest charge based on the loan balance and interest rate, then add daily interest charges for the number of days since the last payment. For example, if the current loan balance is $50,000 and the annual interest rate is 4.00%, then the daily interest charge would be $5.48 per day (or 4.00% annual rate times $50K, divided by 365 days).
Now if you are closing 11 days after the last scheduled payment, then your base payoff amount would be $50,060.28 (or $5.48 daily interest times 11 days, plus $50K).
In addition to the outstanding balance and interest charges, additional fees may be required in order to completely pay off the outstanding loan. These additional finance charges and fees can be late charges, prepayment penalties or other lender fees.
A prepayment penalty is an amount due the lender should the loan not be carried out to full loan term. Late charges can occur when a payment is made beyond the required due date and miscellaneous lender charges can be fees such as payoff statement fee, processing fee and other lender charges.
Some states restrict prepayment penalties on consumer loans to a certain period or prohibit them altogether. Before you take out any loan, it’s always a smart idea to check to see what prepayment penalties are included with the loan offered – so you won’t be surprised when you ask for your loan payoff amount.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.