What Is a Payoff Letter?

Definition & Examples of a Payoff Letter

Illustration of what to know about payoff letters, as explained in article.

Brianna Gilmartin / The Balance

A payoff letter is a document that provides detailed instructions on how to pay off a loan.

Learn more about payoff letters and how they work.

What Is a Payoff Letter?

If you have the funds to pay off an installment loan early, request a payoff letter from your lender. 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 help you avoid surprises by providing all the information you need in one place.

  • Alternate name: Payoff statement

How Payoff Letters Work

When you want to pay off a loan all at once, it's challenging to predict exactly how much you need to pay.

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 chance 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 to eliminate your debt.

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:

  • The date the payoff amount expires
  • Who to make a check payable to (and if a cashier’s check is required)
  • Where to send the money
  • Charges to include with your payment (outstanding penalties or account closing fees, for example)
  • Adjustment amount if paying before or after projected payoff date

To get a payoff letter, ask your lender for an official payoff statement. Call or write to customer service or make the request online. 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. If you’re refinancing or selling your home, your new lender or a title company will most likely make the payoff letter request on your behalf.

Potential Fees

You may run into fees when you pay off a loan early. They may include:

  • Generation fees: 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 off your loan. This is a charge from your lender for handling the payment and closing out the loan account.
  • Prepayment penalties: Although relatively rare, prepayment charges 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 cost to pay off the loan and that you send enough to close the account on your first try.

Alternatives to Payoff Letters

You can also request verbal payoff quotes from your lender. 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, 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.

Types of Payoff Letters

Another type of payoff letter is a letter you get after you've successfully paid off a loan. This letter informs you the debt has been satisfied and it might help if you need to prove the loan no longer exists.

For example, if you’re selling a car 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, so this type of letter might 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 as open that you’ve paid off, they’ll need documentation to remove that error. A letter from the lender helps you get errors removed.

Key Takeaways

  • A payoff letter is a document that provides detailed instructions on how to pay off a loan.
  • If you have the funds to pay off an installment loan early, request a payoff letter from your lender. It tells you the amount due, where to send the money, how to pay, and any additional charges due. 
  • Payoff letters are needed as the exact amount due can change daily. 
  • You can also request a verbal payoff quote, but it's not legally binding. 
  • You may also receive a payoff letter that confirms you've paid off your loan.