Payoff Letter Basics
How to Ensure You Pay Your Loan in Full
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 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 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 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 decent 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:
- Date the payoff amount expires (this is your payment deadline)
- Whom to make a check payable to (and if a cashier’s check is required)
- Where to send the money (if paying by wire transfer)
- Charges to include with your payment (outstanding penalties or account closing fees, for example)
- Adjustment amount if paying before or after 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. Call or write to customer service, or make the request through an automated online system, if one exists. 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 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 and notify you.
Costs of Going Debt Free
It costs money to pay off your debts. A few fees you might encounter include:
- 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 off your loan. This is a charge from your lender for handling the payment and closing out the loan account.
- Prepayment penalties: Although 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 truly cost to pay off the loan—and make sure you send enough to close the account on your first try.
Verbal Payoff 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 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 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 as open that you’ve paid off, they’ll need documentation to remove that error. A letter from the lender should help you get errors removed.
Consumer Financial Protection Bureau. "What Is a Payoff Amount? Is My Payoff Amount the Same As My Current Balance?" Accessed March 18, 2020.
Nolo. "When Are Prepayment Penalties Allowed in New Mortgages?" Accessed March 18, 2020.
Experian. "What Happens When You Pay Off Your Mortgage?" Accessed March 18, 2020.