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Current Balance or Payoff Amount: What’s The Difference?

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Current Balance or Payoff Amount: What’s The Difference?

Current Balance or Payoff Amount What’s The Difference


As you get close to paying off a large loan, such as a car loan or mortgage, you may be tempted to pay the balance due completely in order to end the monthly payments. However, it is important to understand that the balance shown on your statement may not be the actual balance Due. There are differences between a payoff amount and your current balance. Understanding why these amounts may be different is important if you are considering paying the loan off in full early.

Current Balance

The current balance shown on your statement is the unpaid principal plus any unpaid interest. When you take out a loan, the bank applies a portion of your payment to the principal and the remainder to the unpaid interest. Banks use a formula that allows them to pay higher amounts on the interest at the beginning of the loan so you pay less on the principal. As you pay, the amount going toward interest drops and the amount you pay on the principal rises, so that you are paying mostly principal payments at the end of the loan.

Additional Accrued Interest

On some forms of credit, interest accrues daily. This means that the interest on the account has already risen by the time you get your statement. Your balance due, therefore, will be higher when you get the statement than it was when the statement was mailed.

Prepayment Penalties

Some lending companies include prepayment penalties in their loans as the longer you pay on the loan, the more interest they earn. A lender who charges a prepayment penalty must clearly state that in your loan agreement in most states, although not all states have such requirements. Some loans have a condition that your payments are based on precomputed interest that is paid before any amount is applied to the principal.

Determining Payoff Amount

The best way to learn the exact payoff amount of a loan is to contact the lender directly. Most lenders must provide you the payoff amount as well as the date that the payoff amount is good until. For example, they may tell you that your payoff is $300 for the next seven days. Even if the law does not require a lender to provide a payoff, most will do so upon request.

Although you can pay the balance due on your loan, it may not be the best financial option, especially if your lender has prepayment penalties or other loan terms that may end up costing additional money. If you believe your lender is not properly applying payments or they have refused to provide you a valid payoff amount even though they are required to do so by law, contact our office today to learn what rights you may have. Visit us online and complete the simple query form or give us a call today.

Update March 22, 2020: We are fully operational at this time as we are able to continue working remotely and filing electronically. Contact us today to schedule a meeting or consultation via video chat.