When selling your car or buying one, you may have to deal with the issue of a lien before you can either sell or buy it. Once you understand car liens and how they work, you can deal with the situation properly and complete your transaction.

Join us for an insider's view of what a lien is, what are the various types of car-related liens, how to know if a car has a lien on it, the impact of having a lien on a car in various situations, and finally, how to get a lien removed from a vehicle.

What is a lien?

In the simplest terms, a lien is a claim that someone has on your property as security that you will pay them what you owe them. When a car is involved, this most commonly involves the financial institution or lender that provided you with the auto loan that enabled you to buy your car.

In exchange for loaning you the money, the lender, after filing a lien with the state, receives temporary joint ownership of the vehicle up until that point in time when the loan is fully repaid. The lender is now the lienholder, which will be noted on your car's title. This type of lien is known as a Title Lien.

When the car is paid off, the lender has no financial interest. Your obligation to the lender is satisfied, the lender signs away its ownership rights in a lien release, the lien goes away, and ownership reverts entirely to you.

And what happens if you stop making your car loan payments at some point before the final installment? In non-payment, the lienholder has the legal right to take possession of the vehicle and then sell it to pay off the loan balance that it is owed. Any money left over will be returned to you, along with a big black mark on your credit history. Having your car repossessed is a very bad thing. It should be avoided at all costs.

There are different types of liens that can be placed on the car.

Other types of liens

In addition to Title Liens, other types of liens could conceivably be attached to your vehicle. These include:

Mechanic's Lien: This type of lien can be filed against you if you have had a mechanic do some work on your car and have not paid for the work. The mechanic can file some documents with the state's Department of Motor Vehicles (DMV) that will prevent you from selling your car until the bill has been paid.

Judgment Lien: This is a lien that can happen when you lose a lawsuit, owe the other party money, and have no other assets. A judgment lien can then be put on your car. It will require you to pay that party the amount owed before you may sell the vehicle.

How do you know if a car has a lien on it?

It is vital to know whether or not there is a Title Lien on a used car you plan to buy. If you own and sell a car, you should be aware of any liens on it. The downside of being involved with a car with an undisclosed lien is something to avoid. You might face serious legal hassles, not to mention big financial losses, if you find yourself on the hook for unpaid loan payments. Follow along for some easy ways to know if a car has a lien on it:

Look at the car's title: The vehicle title should reveal this fact if a lienholder is involved. Insist on seeing the original document when buying a car - do not accept an easy-to-alter photocopy. If the seller won't let you see the car's original title, walk away - there's something fishy going on.

Use the car's VIN to find out: Write down or shoot a photo of the vehicle's Vehicle Identification Number (VIN), which is found on top of the dashboard at the base of the windshield, on the driver's side. This number should also be recorded on the vehicle's registration and title (make sure all the numbers match). With the VIN, you can look for title liens in a few different ways:

    • On the DMV website for the state, the car is titled in
    • By getting a vehicle history report from Carfax or another provider
    • From your bank or credit union, if a car loan is part of your buying process

Ask the seller for proof: If you are buying a car, ask the seller to show you the lien release document or any other documents proving there are no outstanding liens on the vehicle.

The many impacts of having a lien on a car

When there is a lien on a car, it can affect many aspects of the vehicle ownership experience. Sometimes, it can even restrict your selling options if you sell a car with an outstanding loan. The loan provider's interests must be considered and properly dealt with in all of these areas:

Insuring your car when there is a lien on it

The lienholder on a car has an investment to protect, and your car's insurance policy is a major piece of this protection. You must have the proper insurance coverage if an accident, vandalism, flood, or fire damages your car. This allows the lienholder to recoup its investment in your vehicle, even if it is damaged beyond repair. The insurance that most lienholders require is known as "full coverage."

The exact meaning of full coverage can vary from state to state. Still, it usually includes the two primary types of insurance that protect the vehicle itself: collision coverage and comprehensive coverage.

Collision coverage covers accident damage to your vehicle when it hits another vehicle or some physical object or if it rolls over. Collision coverage will pay for the repairs needed to return your car to normal operating condition (minus your deductible) if the damage is repairable. If the damage is too severe to repair, the insurance company may choose to "total" your car, and it will then pay the lienholder the vehicle's current value. The lienholder will keep what it is owed, and you will receive any remaining balance.

Comprehensive coverage: This coverage takes care of non-collision damage that occurs to your vehicle. This can include damage from natural disasters like floods, earthquakes, wind, hail, and forest fires. It also covers damage from vandalism, theft, stripping parts from your car, riots, explosions, and even hitting an animal. In the event of these types of damage, your comprehensive coverage will take care of repairs if your car can be fixed. If it can't, the insurance company will total the car and pay the lienholder (and you, if anything is left over) its current value.

Buying a car when there is a lien on it

If you are shopping for a used car to buy, you may come across one or more vehicles with title liens. How should you deal with this issue? Here are some options:

The seller pays off the loan before you make the purchase

This is the cleanest way to get that old lien out of the way, with no entanglements on your part. The seller gives the lienholder the payoff amount, the title is signed over solely to the seller, and the car is free and clear of the lien. If the seller claims insufficient cash is available to do this, suggest a personal loan or use of a credit card, which the seller can quickly pay off once you pay for the vehicle. However, this process works out: don't pay the seller until you see a title with only the seller's name and no lienholders! In some states, you may have to wait until one is issued.

The buyer pays off the loan

This is a riskier strategy, but it may be necessary if the seller has no source of funds to pay off the lien and you want the car. Contact the lienholder first to get their approval and the payoff amount. Write a check to the lienholder for this amount. Write another check to the seller for the difference based on the price you have negotiated on the car. If you plan to go this route, prepare a signed agreement that includes all the deal details before you pay anyone. To protect yourself, deal directly with the lienholder to make the payoff and process the paperwork. It would be best to never put cash for the payoff into the seller's hands while going through this process - too much could go wrong.

The buyer assumes the loan and the lien

This could be your only option if you and the seller cannot pay off the loan. Your name replaces the seller's name on the title; you are now on the hook for the remaining payments, and the lien remains. The payoff amount is deducted from the agreed-upon price for the car, and the seller gets what's left.

You should take steps to protect yourself when buying a car with a lien.

Whichever process you choose when buying a car with a lien on it, it will help to be prepared for any glitches that may pop up:

    • Please familiarize yourself with your state DMV's regulations for buying a car with a lien.
    • If the vehicle comes from out of state, know that state's laws, too.
    • Get a bill of sale from the seller.
    • Get all the lien-related documents, especially those showing that the lien has been released.
    • Have all other required documentation.
    • Consider using an escrow service as the middleman for handling the money, paying off the loan, and transferring the title.

Selling your car when there is a lien on it

The lien must be satisfied before you can sell a car with a lien on it. This means that the lienholder must receive whatever balance that it is owed. Under normal circumstances, this involves providing the lienholder with the correct loan payoff amount, which will result in the lienholder releasing its interest in your vehicle. You are now the sole owner, the only name on the title, and you can sell the car.

What can you do if you don't have enough money to pay the loan off first and then sell the car? Get in touch with the lienholder. If they agree, you may have the buyer write two checks to the lienholder for the payoff amount and the rest to you. The lienholder can then sign off on the title, you become the sole owner, and you are clear to transfer the car to the buyer.

Junking your car when there is a lien on it

If you plan to junk your car with a lien, the lienholder must be satisfied before you are free to junk the car. The salvage yard will not accept your car if it has no clear title, is in your name only, and is without liens.

What are your options? The easiest action is paying off the loan first, then scraping your car. Depending on what you owe the lienholder and how much scrap value there is in your car, you might be able to pay the lienholder out of the proceeds from the sale if the car has enough scrap value to pay off the loan. If it does not, you'll need to pay the lienholder out of your pocket, get another loan to pay off the lien, or charge the balance to a credit card.

How do I get a lien removed from a car title?

We have covered a variety of strategies here for dealing with liens, so let's distill it down to a few possible ways to remove a lien from a car title. Some of these may work better than others - it all depends on the amount of the lien, the value of the car, and other circumstances that may be relevant:

Pay the balance to the lienholder

This is easy. Pay the balance remaining, and the lien is released.

Sell the car

This one is also easy. When the car is sold, the balance remaining will be paid to the lienholder, and the lien goes away.

Make all of your car payments

Once you have reached the end of your loan contract, the loan is paid off, and there is no more lien. You can now drive your car free and clear, without monthly loan payments and the lien. Enjoy the freedom!

Negotiate a lower payoff amount

If you are in financial trouble and have difficulty making your car payments, you may be able to renegotiate the loan payoff to something more affordable. Your lender may prefer to accept a lower payoff, removing a loan from its books before it goes bad.

Fix a mistake

Clerical errors can happen, and liens that should have been previously released can appear to still be in effect. If you think this has happened to you, follow the paper trail in your lien documents and verify that the lien was paid off and released.

Go Legal

This should be your last resort. If you believe a lien should have been released but hasn't, it may be necessary to get legal help. Records can be searched, and statutes that specify when some liens may expire can also help. Do as much research as possible before you start an attorney's meter running!