Loan Officer Practice Exam

What might cause the loan balance shown on a credit report to differ from the payoff amount during refinancing?

1. The interest rate

2. The loan term

3. The original loan amount

4. Prepayment penalties

The correct answer is: Prepayment penalties

The loan balance shown on a credit report can differ from the payoff amount during refinancing primarily due to prepayment penalties. A prepayment penalty is a fee that lenders may charge if a borrower pays off their loan early, which is common in certain types of loan agreements. When refinancing, if the borrower intends to pay off the existing loan before its maturity date, the lender may assess this penalty, meaning the actual amount needed to settle the loan will be higher than what is recorded on the credit report as the current loan balance. This discrepancy arises because the credit report reflects the outstanding principal balance, while the payoff amount includes not only the principal but also any additional fees or penalties that apply to early repayment. Other factors like interest rates, loan terms, and original loan amounts can influence monthly payments and the overall cost of the loan, but they do not directly create the difference between the reported balance and the total payoff amount in the context of refinancing. Prepayment penalties are specifically designed to compensate lenders for lost income due to the borrower paying off the loan sooner than expected.