In the course of 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 that you understand what car liens are, and how they work, you can deal with the situation properly and get your transaction completed.
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, and this fact 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 no longer has any financial interest in the vehicle. Your obligation to the lender is satisfied, the lender signs away its ownership rights in a lien release, the lien goes away, and ownership then reverts entirely to you.
And what happens if you stop making your car loan payments at some point before the final installment? In case of 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.
Other types of liens
In addition to Title Liens, there are other types of liens that 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 you have not paid for the work that was done. 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, you owe the other party money, and you 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 very important to know whether or not there is a Title Lien on a used car you are planning to buy. If you own a car and are selling it, you should be aware of any liens on it. The downside of being involved with a car that has an undisclosed lien is definitely something to avoid. You might face some serious legal hassles, not to mention big financial losses, if you should 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:
Take a look at the car’s title: If a lienholder is involved, the vehicle title should reveal this fact. 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 original title of the car, walk away – there’s something fishy going on.
Use the car’s VIN to find out: Either 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 of the car. This number should also be recorded on the vehicle’s registration and title (make sure that all the numbers match). With the VIN, you can look for title liens 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 that can prove that 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. 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. If your car is damaged by an accident, vandalism, flood, or fire, you must have the proper level of insurance coverage. This allows the lienholder to recoup its investment in your vehicle, even if the car is damaged beyond repair. The insurance that most lienholders require is known as “full coverage.”
The exact meaning of full coverage can vary state by state, but it usually includes the two primary types of insurance that protect the vehicle itself: collision coverage, and comprehensive coverage.
Collision coverage: This 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 current value of the vehicle. The lienholder will keep what it is owed, and you will receive any balance that remains.
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, the stripping of 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) the car’s 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 that have title liens on them. 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 not to have sufficient cash 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 on it, 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 really 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, have a signed agreement prepared that includes all the details of the deal, before you pay anyone. And to protect yourself, deal directly with the lienholder to make the payoff and get the paperwork processed. You should never put cash for the payoff into the seller’s hands while going through this process – there’s too much that could go wrong.
The buyer assumes the loan and the lien
This could be your only option, if both you and the seller are unable to pay off the loan. Your name takes the place of the seller’s name on the title, you are now on the hook for all of 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.
Whichever process you choose when buying a car with a lien on it, it will help to be totally prepared for any glitches that may pop up:
- Familiarize yourself with your state DMV’s regulations relating to buying a car with a lien on it.
- If the vehicle comes from out of state, know that state’s laws, too.
- Get a bill of sale from the seller.
- Get all of the lien-related documents, especially those showing that the lien has been released.
- Have all other required documentation.
- Consider the use of 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
Before you can sell a car with a lien on it, the lien must be satisfied. This means that the lienholder must receive whatever balance that it is owed. Under normal circumstances, this involves you providing the lienholder with the correct loan payoff amount, which will then result in the lienholder releasing its interest in your vehicle. You are now the sole owner, the only name on the title, and you are free to sell the car.
What can you do if you don’t have enough money on hand to pay the loan off first, and then sell the car? Get in touch with the lienholder. If they agree, you may be able to have the buyer write two checks – one to the lienholder for the payoff amount, and the rest to you. The lienholder can then sign off on the title, you become 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 are planning to junk your car, and that car has a lien on it, the lienholder will need to be satisfied before you are free to junk the car. Complicating things further, the salvage yard will not accept your car if it does not have a clean title, in your name only, and without any liens.
What are your options? The easiest course of action is to pay off the loan first, then scrap 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 get a lien removed 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. Simply 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 without the lien. Enjoy the freedom!
Negotiate a lower payoff amount
If you are in financial trouble and are having difficulty making your car payments, you may be able to renegotiate the loan payoff down to something more affordable. Your lender may prefer to accept a lower payoff, thereby 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 that this has happened to you, follow the paper trail in your lien documents and verify that the lien was actually paid off and released.
This should be your last resort. If you believe that 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 be of help. Do as much research as you possibly can first, before you start an attorney’s meter running!