A lienholder is the lender that owns your car or other property. Until you pay them back in full, they retain ownership over that property. This lienholder could be your bank, a financial institution or even a private party. Basically, they have the legal claim to your property because they gave you the money to buy it – until then, it’s theirs.
You might see the name of your lienholder on your car title or insurance policy. We are going to dive deeper and take a closer look at what the lienholder is, what their rights are and how to get out of a car lien. For the purposes of this article, we will assume the lien is from a car loan of the kind that you get through a car dealership. There are many other kinds of liens and their effects are largely the same.
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Lienholders and Your Car Insurance
Lienholders will require you to purchase a certain level of car insurance. This protects their investment should the vehicle become damaged, destroyed or stolen.
Comprehensive and Collision Coverage
Most of the time, they require comprehensive and collision coverage on the policy. Collision helps you to repair the car if it’s damaged during an accident. Comprehensive will repair your car if it receives damage from theft, fire, or other causes.
Once you pay off your loan and are released from the lienholder obligations, keeping collision and comprehensive are choices you can make.
Gap Coverage
Sometimes, the lienholder will also require that you purchase additional coverage just in case your vehicle is totaled. This is called lease or loan gap coverage. Basically, it covers the additional amount between the value of your car and the loan amount should something happen to the car. This protects you because for most cars there is a window where your new car is worth less than you owe thanks to depreciation.
With gap protection, you won’t be attempting to pay off the difference on a car loan if the vehicle is destroyed.
Lienholders and Your Car Title
Often, when you borrow for a car, the lienholder will keep the title. Their name is often printed right on the title. That’s because your car title is proof of ownership to your vehicle – their name on the title ensures that you can’t sell the car until your loan is paid off.
Once you repay the loan, the lienholder will sign the title over to you. Most major companies say that this process takes about five days. Then, you submit the appropriate paperwork, including a lien release acquired from your lienholder, to your local DMV and receive a title in your name with the lienholder information removed. At that point, the car is yours to keep or sell as you wish.
I have also heard of people selling a car using the lien release paperwork and the existing title with the lienholder’s information still printed on the title. This isn’t the correct way to do things but depending on your state this might be allowed. Contact your local DMV to confirm.
Does This Car Have a Lien on It?
One of the biggest concerns for people looking to buy a car is whether or not there’s already a lien on it. It’s a good thing to worry about since buying a car with a lien proves to be a disaster. The original lienholder can legally repossess the car, even after you buy it. That’s why you want to check for car title liens before making any purchase.
The best way to discover a car title lien is to run a detailed VIN check on the vehicle using its VIN number. This will determine the status of the title so you can compare with the facts the seller is presenting. Rest assured: it is illegal to hide a lien when selling a car.
How Do I Buy a Car That Has an Active Lien?
What if you find a car you really want, but it has a lien against it? Now what? You do have some options in this scenario.
#1 – Ask the Owner to Get the Lien Discharged
Maybe the owner paid the debt but the title hasn’t been changed yet, in which case they just need to get it processed by the DMV. Otherwise, you won’t be able to register the vehicle in your name. If you want to buy the car and transfer the loan to yourself, have them contact their lender and get the ball rolling. In the meantime, move on to #2.
#2 – Finance the Car
If the owner still has debt on the car and you are planning to finance it, you can talk with your lender and see if they are willing to transfer the other person’s debt to you. Just give them the current lienholder details and they will work on having the title and lien transferred as one.
#3 – Pay off the Loan
If the seller wants to use the money from the sale to pay off the loan, meet at the lienholder’s office to perform the transaction. This is most often a local bank. Then you can pay the lienholder directly and get a record of the transaction.
We recommend that you don’t pay the owner and simply trust them to pay off the loan. If they change their mind, you would be out the money and have a car that could be repossessed. If the lienholder isn’t local, you can have the funds held by an escrow service to help make the deal more trustworthy. Just split the fees for this service with the seller.
How Do I Remove a Lienholder From My Car Title?
Once you have paid off the loan, it’s easy to remove the lienholder’s information from your title.
#1 – Pay the Car Loan in Full
Contact the lender using the information printed in the lienholder section of your title and arrange to pay off the loan. Once it’s been satisfied, the lender should send you an automatic confirmation along with a lien release document and instructions to remove their name off the title. There are times, however, that you’ll have to contact them further to get this done.
The best course of action is to request a letter that confirms the loan has been paid off. You can also complete a state-specific process which proves that you paid the debt, like this example from the New York state DMV.
#2 – Submit Your Information to the DMV
Take any applicable forms to your local DMV. If the lender also gave you a receipt, you’ll want that with you as well. Ideally, it should be sealed in an envelope with the company’s information prominently displayed. At this time, you need to complete any other paperwork required by your state. You’ll also have to pay any fees that are associated with transferring the title into your name.
#3 – Obtain Your New Car Title
Once the car is legally yours, you can choose what to do next regarding your insurance coverage. You are also free to sell the car if you want now that the lienholder information has been removed from the title. Future owners might still be able to discover evidence of the lien using a detailed VIN check, and once you receive the new title you can run one yourself to confirm the lien is no longer showing as active.
Buying and Selling Cars With Liens is Okay!
Most people don’t have the resources to buy their next car with cash, which makes loaning the money the ideal way to go. As long as you understand the power the lienholder has over a vehicle and how to protect yourself in that scenario, you should be free and clear to buy or sell a car with a lien.
We always suggest running a detailed VIN check before committing to buy a vehicle. Our service provides a variety of facts that will reveal an active lienholder and help you make the decision of whether or not to buy. If you find yourself needing a brand-new title, the specialists at Dirt Legal have obtained countess new titles for owners of cars, trucks, SUVs, dirt bikes, and just about anything with wheels. Click the links to learn more about our services.
We are not attorneys. This article is not legal advice. Cover image source
If the previous owner had an outstanding car title loan before selling it to you, you could be liable! This can be fixed very easily.