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When financing a vehicle, the lienholder is the bank or company that loaned you money in order to purchase the car. The lender holds a lien against the car, giving them the legal right to take possession of the car if you fail to settle your debt. That institution's name will appear on the title of your vehicle and your car insurance policy for the duration of the loan. Buying or selling a car with a lien is perfectly legal, but the process takes more work, and it poses some inherent risks to the buyer.
What Is a Lien?
A lien is the legal right to take possession of a piece of property if the debt underlying that property is not settled. A lienholder (also known as a lienor) is a person, company, or financial institution that co-buys that property or sells it to you on credit. For example, if your local bank writes you an auto loan to finance your car, they are the lienholder. You are the practical owner of the car. You have exclusive rights to use and even sell the vehicle, assuming you can pay off the loan. But as long as the lienholder has a financial stake in your vehicle, they're the legal owner, and their name will appear on important documents. This is a slightly different situation than leasing a car in that, when you lease a car, the lessor is the full owner of the vehicle, and you are merely renting it from them. You cannot legally sell a car you're only leasing.
How Do I Find Out if a Car Has an Outstanding Lien?
Buying a car with an outstanding lien against it can be disastrous for the buyer because, if the original owner of the car fails to settle their debt, the lienholder can legally take possession of the car you paid for. The easiest way to determine if any lienholder has a financial interest in car is to check the car's Certificate of Title. Ask the current owner to see the original title, not a copy, and check if any lienholder is listed.
You can also run a Vehicle History Report (VHR) to find out if the car has an outstanding lien and any other concerning facts from its repair history. Check your state's DMV website to see if they offer this service. If not, online databases such as Carfax or Experian's AutoCheck will run comprehensive reports for a small fee. All you need to run these reports is the car's Vehicle Identification Number (VIN), which can be found on the car's title or insurance policy.
How Do I Buy a Car With a Lien Against It?
When buying a vehicle with an outstanding lien, there are a number of scenarios you need to consider in order to protect yourself financially. First, see if the current owner can get the lien discharged. If the owner has recently paid off the loan, the title may simply be outdated, and a new one hasn't been mailed yet. Without a lien-free title in your name, you won't be able to register the car.
If the owner still has a substantial amount of debt owed on the car, see if they can get it refinanced into a private loan from a bank or other institution. That way, you can get the lien lifted from the title and they can settle their debt after selling the vehicle. Or, if you also plan to finance the car, give your lender the current lienholder's details, and they'll cooperate to change the title with a new lien over to you.
If the seller plans to pay off the remaining lien balance upon selling it to you, or if they intend to sell the car with the lien outstanding, arrange to finalize the transaction at the lienholder's office. Agree to pay the lienholder directly for the amount they're owed and pay the current owner the difference remaining from your negotiated price. We recommend against paying the owner the full amount and having them pay the lienholder, but if you do, get your agreement in writing so they don't back out of settling their debt. If they did, the lienholder would have the legal right to take possession of the car you paid for.
Sometimes, if the car was financed by the carmaker itself, the lienholder may not have a local office for you to conduct the transaction. If this is the case, see if you can get the funds held by an escrow service and split the fees with the seller. This benefits both of you by verifying the payment while protecting your interest in the vehicle until you've received a lien-free title.
How Does a Lien Affect My Title and Car Insurance?
If you buy a car with an outstanding lien, or if you decide to finance a car, the lienholder's name will be listed on your title and auto insurance policies. In some states, the lienholder will even keep possession of the original copy of the title for the duration of the loan.
Additionally, financing companies might require you to take out certain insurance policies for as long as they have a financial interest in the car. For example, a lending company may require "full coverage insurance" with $50,000 of bodily injury insurance per person, $100,000 per accident, and $50,000 for property damage (50/100/50), plus collision and comprehensive insurance. This will likely be above and beyond the scope of your state's minimum required liability insurance.
By comparison, Ohio's minimum required insurance, is 25/50/25. The additional protection required by lenders is great to have, but it will drive up your monthly premiums. And even though the lienholder's name is listed on your title and insurance documents, you're still responsible for paying for insurance premiums, general upkeep, and any relevant taxes. If you fail to meet the lienholder's insurance requirements, or if you stop paying the policy's premiums, your insurance company will notify the lienholder. If you let this happen, the lienholder might take out their own policy, and you'll be on the hook for the additional premiums.
If the case that you're financing a new car, we recommend purchasing gap car insurance, also. The minute you drive your new car off the lot, it loses around 10% of its value, and an additional 10% to 20% over the course of the first year. This lower amount is the car's Actual Cash Value (ACV). If you total your car during the first year of ownership, your auto insurance will only cover the ACV, before any deductibles are applied. Gap insurance will cover the difference between the ACV and the amount you paid for the new car.