If you’re looking to buy a car that is already being financed, or are looking to sell your financed vehicle, there will be a lien on it, and that will have to be addressed.
What is a Lien?
Simply put, a lien is a claim on property to ensure a payment of debt. For example, if you financed your car through a bank, the bank files a lien with the state on your vehicle. If you default on a payment, then the bank is entitled to claim the vehicle. If the vehicle gets repaid, a release of the vehicle is provided, which shows that you are the clear owner of the vehicle.
“A lien is essentially collateral by the lender,” explains Philip Reed from NerdWallet.com. NerdWallet is a consumer credit advice site that helps readers find the best car financing and lease rates in addition to insurance information. “It means you’re financially connected to the person who made the loan.”
A lien isn’t a loan; it’s just protection for the person or organization that you borrow the money from. This might not sound particularly complicated when it comes to cars, but a lien does change a few things.
“It complicates some things,” says Reed. “But only in comparison to buying a car with an unsecured loan, or without a loan at all.” An unsecured loan has no lien on it and the lender isn’t protected from the lendee defaulting on their payments.
How a Lien Affects Insurance
Since a lien holder is essentially protecting their asset, they have the right to protect it. That means they can insist you get comprehensive and collision insurance on the vehicle. In some cases, a lien holder can even determine your deductible or minimum liability. This is why the lien holder is on your insurance documents.
“In a lease, they may require higher limits than if you bought it outright,” says Reed. “It comes down to risk. The greater the risk, the better the likelihood [of requiring higher limits].”
How a Lien Affects Buying/Selling a Car
When a loan is completely repaid, a release of the lien is provided by the loan provider, and the car gets a clean title.
That’s important, because before a vehicle with a lien is sold, the balance of the loan must be paid off so the lien gets released. Alternatively, the buyer can make arrangements to take over payments.
“In many states, there’s a sales tax,” says Reed. “So minimizing the amount of transactions involved with selling or buying a car with a lien on it is important.”
Sometimes, it takes two cheques to buy a car that’s been financed: one to the lien holder and one to the person selling it.
A lien lasts as long as a car has an outstanding balance on it, so if you purchase a car with a lien on it, you must pay it out in full. After the balance is paid off, you have to contact the lien holder, who will then clear the title. If a car with a lien on it has an outstanding balance on it, the lien holder has the right to repossess the vehicle. Reed also advises to contact the lien holder any time you want to sell the vehicle, since they have to sign off on any changes to the title.
On the other hand, if you’re trying to sell a car with a lien on it, the lien holder has the first right to any money received on the car. Furthermore, the car cannot be bought unless the lien holder gets paid.
Liens don’t get talked about much when it comes to used vehicles, but they’re an important part of the process that you have to be aware of. Make sure to check the paperwork of any vehicle you’re buying to ensure it has no lien and a clear title, otherwise you may have to pay the outstanding balance of the vehicle to the lien holder in addition to paying off the seller. The DMV will have details on the title holders of the vehicle, so it’s a good place to start when it comes to buying or selling a car with a lien on it.