Per-diem interest is the amount of loan interest that accrues for each additional day before payoff.
Per-diem interest is the amount of loan interest that accrues for each additional day before payoff. In plain language, it is the daily cost of waiting one more day to fully pay the loan.
Per-diem interest matters because payoff timing is rarely static. A borrower who delays payoff for a few days may owe more than expected, especially on a larger balance.
It also matters because many borrowers know the annual rate but do not understand how that yearly rate turns into daily payoff changes. Per-diem interest is one of the clearest ways to connect the rate to the actual payoff timeline.
Borrowers encounter per-diem interest in Payoff Quote requests, lender payoff letters, and refinance closings. It helps explain why a Payoff Amount is tied to a specific date rather than staying valid indefinitely.
It is especially relevant on a Simple-Interest Loan, where cost often follows the unpaid principal balance over time.
A common simplified relationship is:
$$ \text{Per-Diem Interest} \approx \frac{\text{Outstanding Principal} \times \text{Annual Rate}}{365} $$
If a borrower still owes $10,000 at a rate of 9%, the rough daily interest is:
$$ \frac{10000 \times 0.09}{365} \approx $2.47 $$
| Outstanding principal | Annual rate | Rough per-diem interest |
|---|---|---|
| $5,000 | 8% | $1.10 |
| $10,000 | 9% | $2.47 |
| $18,000 | 12% | $5.92 |
A borrower receives a payoff quote that is valid through Friday. If the payoff is not sent until Monday, the lender may add several days of per-diem interest to the amount required.
Per-diem interest is not the same as the full Payoff Amount. It is only the day-by-day interest piece that helps explain why the payoff amount moves over time.
It is also different from a Prepayment Penalty. Per-diem interest is usually ordinary timing-based interest, while a prepayment penalty is an extra contractual cost for paying early.