Payoff Letter Basics

How Loan Payoff Letters Work

Mother and daughter dancing in kitchen
Get your payoff details, and do your debt-free happy dance. Hero Images / Getty Images

A payoff letter is a document that provides detailed instructions on how to pay off a loan. It tells you the amount due (including interest charges up to a specific date), where to send the money, how to pay, and any additional charges due.

Payoff letters, also known as official payoff statements, help you avoid surprises by providing all of the information you need in one place.

After a loan is paid off, you might get a different type of payoff letter confirming that your payment was received and your account is closed.

That letter can be used as proof that your loan has been completely paid off and you have no additional liability.

Basics of Payoff Letters

When you want to pay off a loan, predicting exactly how much you need to pay can be challenging.

Interest charges get added to your loan balance every day (or every month), so the amount you owe changes constantly. If you just try to write a check using the loan balance shown on your last statement, there’s a decent chance that you’ll fail to pay everything you owe. The result will be frustrating: You’ll need to make phone calls, send additional payments, and wait longer than you expected for your debt to be eliminated.

To prevent problems, you can request a payoff letter, and your lender will provide an official document with instructions on how to completely pay off the loan in one transaction.

Payoff letters generally supply the following information:

  • A date that the payoff amount is good for (this is the deadline for making your payment)
  • If paying by check, who to make it payable to (and if a cashier’s check is required)
  • If paying by wire transfer, where to send the money
  • Any charges to include with your payment (outstanding penalties or account closing fees, for example)
  • How much to adjust the payment if you pay before or after the projected payoff date (this helps you pay the right amount of interest if you can’t pay on the exact day specified in the letter)

How to Get a Payoff Letter

To get a payoff letter, ask your lender for an official payoff statement.

You can usually just call write to customer service, or you can make the request through an automated online system. While logged into your account, look for options to request or calculate a payoff amount, and provide details (such as your desired payoff date).

You only need to request a payoff letter if you’re paying off debt yourself – for example, if you’ve got a lump-sum of money that you want to use for an early payoff. If you’re refinancing or selling your home, your new lender or a title company will most likely make the request for you (you should be notified that a payoff quote was requested).

Costs for Going Debt Free

Generation fee: Expect to pay a modest fee for a payoff letter, but in some cases the service is free. The cost might depend on how you get the letter – ask customer service for details. For example, some banks mail the document for free but charge $25 to email or fax it to you.

Processing fees: You might also have to pay processing fees to pay of your loan. This is a charge from your lender for handling the payment and closing out the loan account.

Prepayment penalties: although rare, prepayment penalties still exist on some loans.

Spend a few minutes reading the fine print in your loan agreement or talking with customer service. Make sure you understand what it will truly cost to pay off the loan – and make sure you send enough to get the account closed on your first try.

Verbal Quotes

You can also request verbal payoff quotes from your lender (and, if you like, ask that they follow up by sending a letter). You won’t have an official and legally binding document, but you’ll have a rough idea of how much money you need on hand to pay off your loan. You can even move forward with payment based on a verbal quote – but if you got bad information you won’t have any recourse.

Using a verbal quote is risky in a mission-critical transaction. But if you’re not worried about how long it takes to sort things out (and you can wait around while money gets shuffled and accounts get adjusted), a verbal payoff amount helps you get the ball rolling.

Payoff Letters as Proof

Another type of payoff letter is a letter you get after you have successfully paid off a loan. This letter informs you that the debt has been satisfied, and it might be helpful if you need to prove that the loan no longer exists. For example, if you’re selling a car that you recently owed money on, your buyer might be reluctant to move forward if you don’t have a clear title. It can take lenders a while to remove liens and send titles (unfortunately), but this type of letter might help you keep things moving.

A payoff letter can also come in handy if you’ve got errors in your credit report. If a credit bureau is incorrectly reporting a loan that you’ve paid off, they’ll need documentation to remove that error. A letter from the lender (among other things) should help you get errors removed.