What Is the Difference Between Payoff & Balance on a Loan?

by Tim Plaehn
Car loans are a common example of loans that have differing balance and payoff amounts.

As you make the payments on any loan that you take out, such as an auto loan or home mortgage, the balance of the loan drops. After the last scheduled payment, the balance will be zero and the loan paid off. If you want to pay off the loan early, the amount you need to close out the loan may be different than the current balance.

Reducing the Balance

Each time you make a payment on a loan, part of that payment will be interest collected by the lender while the remaining amount goes to reduce the outstanding loan amount. The balance tracked by the lender is updated each time a payment is received and credited. If you call the lender or check your balance online, this is the value you will typically receive.

Calculating the Payoff

If you want to pay off the loan, some additional costs may be tacked on to the current balance. Some loans have early payoff penalties, for example -- you must pay these pre-payment penalties if you want to pay the loan balance early instead of making all of the scheduled payments. Additional interest may be another extra cost. If loan interest accrues daily and you pay off the loan in the middle of the month, the lender will want 15 days' worth of interest on top of the last balance amount.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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