What Is the Difference Between Payoff & Balance on a Loan?

When you have been making payments on a loan for a long time, the balance you owe on the loan may come down to a point where you can seriously consider paying off the entire remaining balance listed on your current statement. But when you talk to the lender about doing a payoff, you might find out you owe more than the statement balance in order to close out the loan.

What's Your Payoff?

If you plan to pay your entire loan balance, contact your lender for a payoff amount. This is the fastest and most accurate way to find out exactly how much it will cost to close out your loan. Some lenders may require that you ask in writing for a payoff quote. Others will provide you the quote over the phone. Others might quote you a payoff balance through their website. The amount quoted by the lender to pay off the loan is essentially an updated loan balance. The lender will add to the statement balance all unpaid interest accrued between the statement date and the intended payoff date, plus any payoff fees prescribed in the loan terms such as a prepayment penalty.

The Difference Is Interest

The payoff balance on a loan will always be higher than the statement balance. That’s because the balance on your loan statement is what you owed as of the date of the statement. But interest continues to accrue each day after that date. The lender will want to collect every penny in interest due to him right up to the day you pay off the loan.

Residual Interest

Your lender will quote a payoff balance as of a specific date, but it will continue to add interest to your principal until the day your payment actually reaches their processing center. Because your lender more than likely allows for electronic payments, it should post quickly. However, if your payment is late for any reason, such as a postal delay if you mailed it, you may find you owe a few days of residual interest. The lender will bill you for the amount you still owe plus a late fee. To avoid this problem, allow for a few days of payment delay when you set the effective date for your payoff. If your payment arrives prior to the effective payoff date, the lender will refund the excess interest you paid via a check or account credit.