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All You Need To Know About Car Liens

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In a Nutshell

A lien is a legal term that means that a creditor has a legal right or valid claim to certain property if a borrower fails to pay their debt. Cars that are financed have liens on them. As long as a lien is on the car, the borrower doesn’t really own the vehicle. This article will discuss what liens are and how car liens work.

Written by Attorney Eric Hansen
Updated December 12, 2021

If you’ve borrowed money to buy a car, you might know a thing or two about car liens. Then again, maybe you were excited about your new wheels and didn’t pay much attention to the fine print on your auto loan. But chances are if you’ve received an auto loan, there was or still is a lien on your vehicle. Cars that are financed have liens on them. As long as a lien is on the car, the borrower doesn’t really own the vehicle. This article will discuss what liens are and how car liens work. 

What’s a Lien?

A lien is a legal term. It means that a creditor has a legal right or valid claim to certain property if a borrower fails to pay their debt. The debt is “secured” by the property, which is called collateral. The lien represents the creditor’s security interest in the property. This means that they can take the property from the borrower if they default on repaying the loan or breach the contract. You can think of a lien as a kind of insurance policy for the lender that guarantees the underlying obligation, like repayment of a personal or auto loan.

A lien is often public record. It notifies the public that the creditor has a security interest in the collateral and can attempt to collect it if the borrower fails to make payments. If a debtor doesn’t pay their liens and satisfy the underlying debt, a creditor can enforce the lien by foreclosure or taking the collateral and selling it at a public auction to recoup their losses. With a car lien, this would lead to repossession.

There are many different types of liens, some of the most common liens are:

  • Car liens

  • IRS liens

  • Child support liens

  • Judgment liens

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Car Liens

A car lien is a legal contract that safeguards the lender against borrowers who fail to keep up with their auto loan payments. Lenders require this added protection when borrowers finance their auto purchases. The lien “attaches” to the title of the car and remains there until the loan is paid off and the lender releases it.

A lienholder is a person or company who has the lien. This gives them the legal right to repossess the car if the borrower fails to make their monthly car payments or breaches their car loan agreement. One common way borrowers breach these agreements is by not having auto insurance. A lienholder can be a financial institution like a bank or credit union, a private lender like a friend or relative, the dealership that you purchase the car from, or a car manufacturer’s financing company subsidiary. The auto loan and the title to the car will list who the lienholder is and their contact information.

How Does a Lien Affect Your Car Insurance and Car Title?

Typically lienholders require borrowers to purchase and maintain comprehensive car insurance. While this helps protect the lender’s investment against damage, it will also mean your insurance premium is higher. Comprehensive car insurance is more expensive than liability insurance.

A car lien will also show up on your car title until the loan is paid off and the lienholder no longer has a security interest in the vehicle. If you buy a car using financing from a bank or a private lender, the name of the lender is stated on the certificate of title as a lienholder. This gives notice that the car itself is collateral and the lender has a security interest in the property. Once the loan is paid in full, the lienholder’s name is removed and the title is free and clear. That’s when you truly own the car — when there are no lienholders and you’re the only person with a legal right and claim to the property.

How To Check for a Lien on a Vehicle

If you are considering buying or selling a vehicle, you should be aware of liens and know how to check for a lien on a vehicle. It’s illegal to hide a lien when selling a car, so a private seller should disclose that there is a lien on the car. If you are purchasing a new car, you can be assured that it won’t have a lien history. But a used car could have several liens on it. You’ll want to be sure there are no liens on the car when you purchase it.

There are several ways to check for a lien on a vehicle. One of the simplest is to look at the car’s title. Usually, the title will list the lienholder(s). Otherwise, a vehicle history report like a CarFax can provide the lien history of a used car. Also, some states’ Department of Motor Vehicles (DMV) websites allow car buyers to search for liens online using a car’s vehicle identification number (VIN) or license plate number.

How To Sell or Buy a Car With a Lien

A car with a lien can be bought or sold but there’s usually more work involved than just writing up a bill of sale for the new owner. To sell a vehicle with a lien you can do any of the following:

  • Sell through a dealership.

  • Process the sale at the lender’s office.

  • Have the buyer assume and pay the lien.

  • Use an escrow account. 

Alternatively, the buyer can ask that the seller pay off the loan or the buyer can take over the payments that the seller still owes.

It is much easier and smoother to sell a vehicle when there isn’t a lien on the car. You can sell a vehicle when the loan is fully repaid and the lienholder’s name has been removed from the vehicle title. At this point, you own the car free and clear.

Types of Car Liens

There are several different types of car liens and many reasons why a car lien might be listed. The most common reason is that the vehicle is financed. Less common liens include operation of law liens, child support liens, and mechanic’s liens.

If you see one of these less common liens on a car title or vehicle history report, be careful. If you are set on purchasing that particular vehicle you should make sure the contract includes a provision that releases you, the buyer, from all legal and financial responsibility related to the lien. If you are the seller, you should disclose this lien and pay it off immediately as many states have an innocent purchaser law that protects car buyers.

Releasing the Lien

When a car loan is fully repaid, the lien is released. A new title may be issued. The lienholder no longer has a security interest in the collateral and cannot repossess the car and foreclose on the lien. The borrower now owns the car free and clear from other property claims and can do what they want with it. If you’ve had a car lien released on a vehicle you own, you can sell it or reduce your insurance coverage from comprehensive to liability.

The process of releasing a lien varies by state, so you may want to contact your loan servicer or the DMV to make sure you understand your state’s requirements Visit the DMV’s website to find more information about titles, ownership transfers, and private party sales.

Let’s Summarize…

A car lien is a kind of insurance for lenders when you take out an auto loan. It gives them the legal right to repossess your car if you default on your loan repayment or don’t follow the terms of the contract. One common contract requirement is to have comprehensive car insurance. A lien attaches to the car’s title and remains there until the car is paid off. At this point, you release the lien — a process that varies by state. You have a few options to buy or sell a car with a lien, but the process is not as straightforward as doing so with a car without a lien.

Written By:

Attorney Eric Hansen

Eric D. Hansen is an experienced Minnesota attorney within a number of varying and nuanced practice areas. He has operated his own solo practice as well as worked at small suburban boutique firms and large diversified downtown law firms. Eric has a wealth of experience in busines... read more about Attorney Eric Hansen

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