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When financing a vehicle, the lienholder is the bank or company that loaned money for the purchase of the car.
The lender holds a lien against the car, giving them the legal right to take possession of the car if the borrower fails to pay the debt.
That institution's name will appear on the title of the vehicle and the 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 poses some 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 on it is not paid. A lienholder (also known as a lienor) is a person, company or financial institution that cosigns on the property or sells it to the borrower on credit.
For example, if your local bank writes an auto loan to finance a car, they are the lienholder. The borrower is the practical owner of the car and has exclusive rights to its use. Assuming the borrower can pay off the loan, they can even sell the vehicle. But as long as the lienholder has a financial stake in the vehicle, they're the legal owner on paper, and their name will appear on important documents.
This is a different situation than leasing a car. When someone leases a car, the lessor (the dealership) is the full owner of the vehicle, and the borrower is merely renting it from them. The lessee cannot legally sell a car they’re 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. Even if you’ve paid the seller for the car, if the original owner fails to settle their debt, the lienholder can legally take possession of the car.
The easiest way to determine if any lienholder has a financial interest 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 any outstanding liens or a concerning repair history. Check your state's Department of Motor Vehicles (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 is the 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 to protect yourself financially.
1. The owner has paid the loan. If the owner has paid off the loan, the title may simply be outdated, and a new one hasn't been mailed yet. See if the current owner can get the lien discharged and an updated title. Without a lien-free title in your name, you won't be able to register the car.
2. The owner plans to continue paying the loan on 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.
3. The owner plans to pay off the loan using money from the sale. If the seller plans to pay off the remaining lien balance upon selling it to you, 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.
Sometimes, if the car was financed by the carmaker itself, the lienholder may not have a local office where you can 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.
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 were to default on the loan, the lienholder would have the legal right to take possession of your car, even though you paid for it.
How does a lien affect my title and car insurance?
If you buy a car with an outstanding lien or 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.
Financing companies might require you to have certain policies for as long as they have a financial interest in the car.
For example, a lender may require full coverage insurance with $50,000 of bodily injury insurance per person, $100,000 of bodily injury per accident and $50,000 of property damage per accident(50/100/50), plus collision and comprehensive insurance. This will likely be more than your state's minimum required liability insurance: For comparison, Ohio's is 25/50/25.
The additional protection required by lenders is great to have, but it will drive up your monthly premium. And even though the lienholder's name is listed on your title and insurance documents, you're still responsible for paying the insurance premiums and any taxes, as well as for upkeep. If you fail to meet the lienholder's insurance requirements or stop paying the premiums, your insurance company will notify the lienholder. Then, the lienholder might take out their own policy, and you'd be on the hook for the additional premiums.
If you're financing a new car, we also recommend purchasing gap car insurance. 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 car.