Calculating per diem interest and payoffs

The per diem formula

Per diem interest is the interest that accrues in one day. The basic formula is: balance × annual rate ÷ days in the year. On a $250,000 balance at 11% with a 365-day year, the per diem is 250,000 × 0.11 ÷ 365, or about $75.34 per day.

The balance in that formula depends on your note. Some loans accrue on the full commitment from day one; others accrue only on the amount that has actually been funded. On a construction loan those can be very different numbers.

360 versus 365 days

Some notes use a 360-day year, which produces a slightly higher per diem for the same rate. Using the same example, 250,000 × 0.11 ÷ 360 is about $76.39 per day — over a year, roughly $380 more. Neither method is wrong, but your calculation must match what the note says, every time.

Default interest and late fees

If a loan goes into default, many notes replace the note rate with a higher default rate from the default date. The per diem changes accordingly: on the same balance at a 18% default rate and a 365-day year, it's about $123.29 per day. Late fees are usually a separate charge — often a percentage of the missed payment — and should be listed separately on any statement.

Limits on default interest and late fees vary by state. Confirm your terms with counsel.

Building a payoff statement

A payoff statement tells the title company exactly what's needed to satisfy the loan on a given date. It should be clear enough that someone who has never seen the loan can check it.

• Outstanding principal balance
• Accrued interest from the last paid-through date to the good-through date
• Any default interest, shown separately
• Unpaid late fees and other fees owed under the note
• Fees for the payoff itself, such as a wire fee
• The total due, the good-through date, and the per diem after that date
• Wiring instructions

Worked example

A $250,000 loan at 11% on a 365-day year is paid through March 31. The title company requests a payoff good through April 20. Accrued interest is 20 days × $75.34, or $1,506.85 when calculated from the exact daily amount. Add one unpaid $500 late fee and a $35 wire fee, and the payoff is $252,041.85, with a per diem of $75.34 for each day after April 20.

If closing slips two days, the title company adds two days of per diem rather than requesting a new statement — which is why the per diem must be on the page.

Common mistakes

Most payoff errors come from a few sources: using the wrong day count, forgetting a funded draw that increased the balance, missing the default date, double counting a fee already paid, or off-by-one errors in the number of days. A payoff built from a running daily accrual avoids most of them, because the math has already been done every day.

After the payoff

When funds arrive, compare the amount received to the statement and to the actual payoff date. If closing happened later than the good-through date, the extra per diem should be included. Close the loan, record the final income, and release the lien as required.

This guide is general information, not legal or tax advice.

Partial months and payment timing

Most private loans bill monthly but accrue daily, so a month with 31 days costs more interest than a month with 30, and February costs less. If your note bills a fixed monthly amount, track the difference between the billed amount and the daily accrual so the payoff picks up anything that wasn't billed. If you bill actual daily interest, each statement will vary slightly from month to month — that's expected.

When a payment arrives late, interest has continued to accrue in the meantime. Apply the payment as of the date it was received, not the due date, so the paid-through date and the next payoff stay accurate.