What it means
The balance shown on a monthly loan statement is not the figure you need to close the account. Interest builds up every day between payments, and there can be fees for closing the account or for early repayment.
A payoff statement adds all of these together to give a precise figure. The statement is tied to a payoff date, because interest continues to build each day.
Most lenders show a per diem, which is the daily interest amount, so that if the payment arrives a day or two later you can adjust the total. Paying the amount on the statement after the stated date may leave a small balance outstanding.
Payoff statements are essential in property transactions. When a business sells a building that has a mortgage, the buyer's lawyer or the closing agent requests a payoff statement and uses it to pay the lender out of the sale proceeds before the seller receives the rest.
Refinancing works in the same way, with the new lender paying off the old loan. A statement usually contains the lender's name, the account details, the principal balance, the interest due, any late charges or prepayment penalties, the per diem and instructions on how to pay.
Finance staff should check each line against the loan agreement, since errors and unexpected fees do occur. It is also useful for business planning.
A company considering selling an asset can request a statement to see how much of the proceeds will go to the lender. Many lenders provide the statement within a few working days, and some give an online calculator, but the official document is the one that counts.
In practice
Real-world examples.
Example
A restaurant owner sells his building for $900,000 and has an outstanding mortgage. The closing agent requests a payoff statement showing $412,350 on the closing date. That amount is paid to the bank from the proceeds, and the owner receives the balance after costs.
Example
A manufacturer refinances an equipment loan at a lower rate. The new lender asks for a payoff statement to calculate the amount it will advance. The statement includes a prepayment fee of $4,000, which the finance team had not budgeted.
Example
A founder wants to clear a business loan with a bonus she has received. She requests a payoff statement and sees that the amount is $3,200 above the balance on her last monthly statement because of interest and fees. She transfers the exact figure to avoid a remaining balance.
Formula
Calculation
Payoff amount = outstanding principal + accrued interest + fees; per diem interest = principal x annual rate / 365
Suppose a company has a loan with an outstanding principal of $146,000 at an annual rate of 5%, and interest was last paid 15 days before the payoff date. Per diem interest = 146,000 x 5% / 365 = 7,300 / 365 = $20 a day. Accrued interest = 20 x 15 = $300. If the lender charges a $75 closing fee, payoff amount = 146,000 + 300 + 75 = $146,375. Some lenders use a 360-day year, so the statement should always be checked for the method used.Case study
Seen in the real world.
Wexcombe Interiors is a fictional design company created for this illustration. It agreed to sell its studio for $750,000, and the closing was set for the end of the month.
The finance manager had assumed that the mortgage balance of $284,000 on the latest statement was the amount due. The payoff statement showed $286,300, which included 17 days of interest of about $800 and an early repayment fee of $1,500.
The illustrative lesson is that the real cost of closing a loan can differ from the headline balance. Because the manager had asked early, there was time to challenge one fee, which the lender reduced, and the closing went ahead on schedule.
Watch out
Common mistakes.
- Paying the balance on the monthly statement, when interest and fees mean it is usually not enough to close the loan.
- Ignoring the expiry date of the statement, since the figure is only valid for a limited period.
- Failing to check the fees against the loan agreement, which can allow wrongly charged items to pass.
Questions
People also ask.
How long does it take to get a payoff statement?
Many lenders issue it within a few working days, so request it well before the closing or refinancing date.
What is a per diem?
It is the interest that builds up each day, and the lender gives it so that you can adjust the total if payment is made a day or two after the date shown.
Is the payoff statement the same as a final statement?
No, the payoff statement is a quote for a future payment, and a final statement or release letter comes after the loan has been repaid.
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