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Making That Last Loan Payment: What You Need to Know

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Paying off a loan is one of the best financial feelings there is, and nothing kills that vibe more than finding out you made a mistake in the process. When you should be celebrating, you’re left frustrated and wondering why and how you messed up.

These mistakes could also end up damaging your credit score or leading to other financial consequences if you aren’t careful in planning your loan payoff.

For example, if you think you paid off the loan but a balance remained after what you thought was your final payment, you could incur late fees or a late payment entry on your credit report. Payment history has the most impact on your credit scores, so missing bill due dates can cause serious damage. Sometimes, people don’t realize they messed up their loan payoff until they notice a drop in their credit scores or receive a notice from a debt collector.

You don’t want to learn these things the hard way, so we asked loan experts to tell us about the most common loan payoff mistakes borrowers make. Here’s what they say you need to know.

Ask For the Payoff Amount

An outstanding loan balance will continue to accrue interest until it’s paid in full. If you check your current balance and schedule a payment to cover the whole thing, that balance could grow slightly between the time you entered the payment information and when the payment processes. This is the most common thing people overlook, according to experts in the student loan, auto loan and mortgage industries.

“I think some people may not understand that the payoff amount is different from the amount on their last statement,” said Nikki Lavoie, a spokeswoman for Navient, a major student loan servicer. “Borrowers should really ask their servicer for the payoff quote because it really might be more than you think.”

That scenario most frequently pops up when you’re trying to pay off a loan ahead of schedule (which can help you save a lot of money), but the same issue can arise even if you’re taking the loan to term.

“If a borrower has incurred any additional charges, including late fees, non-sufficient check fees, or other charges that were not included in the original loan amount, those charges may still be owed even after the final installment payment is made,” Rich Hyde, chief operating officer of auto lender Prestige Financial, wrote in an email. “Additionally, if any of the monthly payments have been made a few days late, there could be remaining interest charges.”

Overlooking that extra balance is where things can get really messy. Heather McRae, a senior loan officer at mortgage lender Chicago Financial Services, said people tend to learn the hard way how important it is to confirm your payoff amount.

“What I mean by ‘they found out the hard way’ is they stopped making payments because they thought they paid off the loan and then they begin to receive late notices from the creditor,” McRae wrote in an email. “I have seen this happen and its negative impact on credit.”

Depending on your creditor, you might be able to find out the payoff amount by checking your account online, or you could call and ask for it. Make sure you ask what date that amount is good through and how long it will take for the payment to process once it’s received. Paying through the mail will likely be the slowest option (leaving the most room for error), but even paying online requires careful attention. For example, your payment might post the same day if it’s made before 4 p.m. eastern time, but if you’re making a payment at 5 p.m. Pacific time on a Friday, your payment may not go through till Monday. Yes, it’s a little complicated, so that’s why you want to take the time to ask questions about a payoff quote.

Making the appropriate final payment is the main mistake Lavoie, Hyde and McRae see borrowers make when paying off a loan, but there are a few other things to know.

Keep Good Records

It’s not a bad idea to hold onto proof that you paid off a loan, just in case someone tries to collect on it later. To do that, you’ll need to ask for a notice stating the loan is paid in full, which you may receive automatically, but you may not. Ask your lender when you can expect to receive that notice, and follow up if that date passes and you haven’t gotten anything.

Stop Your Automatic Payment

If you’ve scheduled an automatic transfer from your bank account to your creditor, make sure that payment stops after you’ve made your final payment. Again, this often happens automatically, but you may have to manually stop it.

Watch Your Credit

Following a loan payoff, you’ll want to make sure it’s reported to the major credit reporting agencies. You should regularly review your credit anyway — you can get your free credit reports once a year at AnnualCreditReport.com — but it’s especially important after a major change like a loan payoff.

You may see your credit score change after that loan payoff, as well, so don’t be surprised when you check your credit scores and see some different numbers. How much your score changes will vary by situation and other credit history, but you can get an idea of why your scores changed by reviewing your free monthly credit report summary on Credit.com

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