Shopping for a vehicle can get expensive. In fact, the average price of a new car topped $47,000 in 2021. 

With such a big price tag, it’s not surprising that you’d need to get a loan to pay for the cost. Whenever you do this, the finance company puts what’s called a lien on the vehicle.

But the details of a lien can be confusing. So, let’s take a closer look to explore the question car buyers everywhere are asking – what is a lien and who is a lienholder?

What Is A Lien?

A lien is a legal right to an asset (like a car or home) that’s used as collateral to satisfy a debt. 

In the case of purchasing a vehicle, the bank that loans you the money to purchase it from the dealership places a lien on the car until the loan is paid off. 

This is the best way the bank can ensure they get their money back either through repayment of the loan or repossessing your vehicle if you fail to make payments as agreed upon. 

Who Can Be A Lienholder?

A lienholder is the person or company who holds the lien.  

Typically, a lienholder is your lender. The lender is most likely a financial institution, such as a bank or credit union. But if you borrowed money from a family member or friend in a formal loan agreement, they would be named the lienholder. 

Another possible lienholder for your car is a mechanic. If you don’t pay your mechanic for work completed on your car, they have the legal right to file for a mechanic’s lien. The amount of the lien would be equal to the cost of their parts and labor. Depending on your state, a mechanic’s lien could allow them to sell the vehicle to recoup their costs. 

How Do I Find Out If a Car Has a Lien?

When you’re buying a vehicle, you want to avoid a car with a lien on it if possible.  Doing so makes the process more challenging. Typically when purchasing from a dealership they will already ensure it doesn’t have a lien, but if you’re buying from an independent seller, family member or friend, you should be sure to check yourself.  

There are several ways to discover if a vehicle has a lien before you buy it. 

Review The Paperwork

The first thing to do is look at the vehicle’s title and registration. 

If the vehicle has a lien on it, you’ll see the lienholder’s name on the paperwork.

Check With The DMV

If you can’t easily access the vehicle’s title, then you can go to your local DMV. 

The good news is you likely won’t have to brave the in-person drudgery of the DMV. In many states, you’ll have the option to check out the details online. You will need the VIN, or vehicle identification number which is typically easy to locate directly on the vehicle. 

Even if you can’t run an online search in your state, you may be able to submit a request for the information through the mail. 

Keep in mind you’ll likely have to pay a small fee to get this information. 

Look At The Vehicle History Report

The last option is to pull a vehicle history report. Two popular providers include The National Motor Vehicle Title Information System, AutoCheck, and Carfax. 

With this report, you can see whether or not there is a lien on the vehicle. Additionally, you’ll learn more about the car’s history including mileage, previous accidents, maintenance and more.  

How Does A Lien Impact My Car Insurance?

The lienholder can set up specific car insurance requirements as part of receiving the loan.  They set these requirements with the goal of protecting their interest in the vehicle in case of an accident. 

In many cases, a lienholder will require you purchase comprehensive or collision coverage. Both of these insurance options are significantly more expensive than the minimum liability coverage required by your state. That’s because you receive significantly more coverage.

Once you pay off the loan, you’ll have the option to switch to a lesser coverage policy such as a liability insurance policy.

But just because you have to purchase comprehensive coverage or collision coverage in order to secure an auto loan it doesn’t mean you should overpay. 

Take the time to compare auto insurance rates so you have the insurance coverage you need at a price that fits your budget. We can help you compare rates from 65+ top auto insurance companies in just a few minutes. Enter your zip code below to get started. 

Do I Have a Lien When I Lease a Car?

Financing a car will result in the lender becoming the lienholder until you pay off the auto loan. 

But if you are leasing a car, there isn’t a lienholder to consider. That’s because the financial arrangement is different. Instead of borrowing money to purchase a car, you’ll pay the owner of the car a monthly payment to drive the vehicle temporarily.  

When you lease a vehicle, you may not have a lienholder, but you likely still have to meet specific car insurance requirements set by the lessor. In most cases, that’ll include securing comprehensive or collision auto insurance coverage. 

How Do I Add a Lienholder to My Car Insurance Policy?

The lienholder may need to be added to your car insurance policy as the loss payee. That means in the event of a claim, the insurance company would pay out the claim to the lienholder. 

If you need to add a lienholder to your car insurance policy, the easiest option is to speak directly to your insurer. You’ll have to provide the insurance company with your lienholder’s information, which you can likely do online. 

In some cases, the lienholder will contact the insurance company themselves. But most insurers will need to speak to you directly to confirm any changes to your policy. 

After you pay off the vehicle, be sure to contact your insurance company again to remove the lienholder from your insurance policy. 

Can I Buy Or Sell A Car With A Lien?

So, is it possible to buy or sell a car with a lien? It depends. Take a closer look at how having a lien on a vehicle impacts the process of buying or selling a vehicle. 

Buying A Vehicle With A Lien

It is possible to buy a vehicle with a lien on it, though it’s not recommended.

That’s because you can’t receive the vehicle’s title until the current owner pays the outstanding balance. 

With that, you really shouldn’t pay any money directly to the seller until they have settled the balance of their outstanding loan. Otherwise, the vehicle could be repossessed even though you paid the seller for the car. 

In this case, confirm with the lienholder that the balance is paid before purchasing a vehicle with a lien. Or you could work with the seller and the lienholder to have the outstanding loan transferred directly to you, assuming that the loan balance is appropriately reflected in your purchase price. 

Another option is to look for a vehicle to purchase without an outstanding lien so you don’t have to worry about this at all. 

Selling A Vehicle With A Lien

If you want to sell a vehicle that has a lien on it, then you’ll need to pay off the outstanding loan balance first. You cannot transfer the title to yourself without paying off the outstanding lien. Therefore, you can’t sell it and transfer the title to someone else.

An easy solution is to sell the vehicle to a car dealership. Although you will likely miss out on the opportunity to get the highest sale price, dealerships are used to handling the paperwork that accompanies buying a car with a lien.  

If you want to sell to a private party, consider transferring the lien directly to the buyer. In this case, you’ll have to subtract out the cost of the lien from the purchase price. Although there is usually a fee involved with this process, it is a secure way for the buyer to move forward with the purchase. 

Frequently Asked Questions

Is the lienholder the vehicle owner?

No, the lienholder doesn’t own the vehicle, but they do have a financial interest in it. As long as you repay on the loan as agreed upon you retain exclusive right to use the car. However, if you don’t make payments the lienholder can repossess the vehicle. 

What does having a lien mean?

A lien is a legal right to an asset (like a car or home) that’s used as collateral to satisfy a debt until it’s paid off. The lienholder will have certain financial rights and privileges related to your vehicle until you pay the outstanding loan balance. 

What can a lienholder do if I don’t repay the loan?

If you don’t repay the loan, the lienholder can repossess your vehicle. Once repossessed, the lender will typically sell it to recoup their money.

How to remove a lien from my car?

When you pay off your loan on the vehicle, you can request a lien release from the lender. With that document, you’ll receive a new title which removes the lienholder. 

How to shop for car insurance with a lien

If your vehicle has a lien, determine what car insurance requirements the lienholder has set. With a clear understanding of the requirements, start comparison shopping for the best possible rate. We can help you explore your options quickly and easily at Compare.com