What is a Lien on a Car?
Securing a loan for a vehicle has become the most popular way for buyers to finance their new car. When a buyer agrees to a loan, they are borrowing money from a lender to make a purchase. The lender makes money on the loan via interest payments, and financing a vehicle also allows the lender to place a lien on the title.
What is a lien on a car? A lien represents the legal interest a lender has on a property. This could be a car, a home, a boat, etc. The property is the collateral for the loan or for the debt.
The Lienholder’s Rights
When a buyer finances a vehicle, a lien is attached to the car’s title with the name of the lender. This means that if the buyer doesn’t make timely payments or falls behind on the debt, the lender has a legal right to the property to satisfy that debt.
This is how a lender can repossess a vehicle. By taking the property, the lender can sell it to pay the debt. In some cases, if the property sells for less than the loan balance, the lender might take additional legal action.
Liens are common. If an individual has a mortgage on their home, their home lender has a lien on the home. Cars with loans have liens. Some cars and homes have second or third liens. A home equity line of credit (HELOC) allows that lender to place a lien on a home.
There are different types of liens, though. Some are voluntary, while others are involuntary. Tax liens, for example, fall into the involuntary category.
Vehicle owners who opt for a title loan also have a lien on their vehicle placed by the lender for the title loan. In addition, if an individual is sued or owes money for outstanding taxes, a lien can be placed on their home or land to help satisfy these debts, too.
Can You Sell Property with a Lien?
A lien legally denotes that a debt must be paid, and a lien also can allow the lienholder to sell that property to satisfy this debt. Can a lien impact an individual selling their property? In some cases, yes, the lien can complicate the sale.
A car owner who is still paying the loan on their car should call their lender before pursuing the sale of the vehicle. While the lender might allow the sale, they might have stipulations for selling the vehicle.
Homes with mortgages have liens attached to the property. When a home is sold, the mortgage lender is paid in full at closing. No profits can be provided to the homeowner until all lien holder debts have been paid.
If there is a HELOC lender, they must be paid. If someone else placed a lien on the property for a debt, that lien must be satisfied, too. Depending on the lien, the debt might need to be paid before a sale.
Liens and the Property Title
When a car owner has paid their loan in full, the lender will provide paperwork that releases the lien. With this paperwork, the car owner can then re-title the vehicle (if they wish) to have the lien holder removed.
If a car owner trades in their vehicle and they didn’t re-title to clear the lien, they also need to provide the dealership with the paperwork that legally removes the lien. This would allow the dealership to take full possession of the vehicle.
Car owners should keep all paperwork from their lender in a safe place. While a lender could reissue the lien removal paperwork, this could be a frustrating hassle. When the loan is paid in full and the lender’s interest is satisfied, car owners should watch for the official paperwork in the mail.
Lien removal paperwork could vary by state. In addition, some car owners don’t hold the title of their vehicle until the loan is paid in full and the lien is removed. In states where the lender holds the title, car owners need to be watchful of all paperwork and their title when they know they’ve satisfied the terms of their loan. Hopefully, the lender sends all documentation via certified mail, but car owners shouldn’t assume this is the case.
Who Can Place a Lien on a Car?
Car owners might wonder who could place a lien on their vehicle. A lender whose loan or whose financing was backed by the value of the car might have a lien on a vehicle. This includes the original lender for a car loan or even a title loan.
In addition, some states allow mechanics to place a lien on a car for any unsatisfied debts. This is called a mechanic’s lien.
In a case where an individual’s car is used as collateral for a debt, the lender or individual to whom the debt is owed might be able to place a lien on the property. However, every state could differ regarding who is allowed to place a lien on specific property.
Can Car Owners Remove a Lien Quickly?
A lien is removed when a debt is paid in full, and car buyers who want to own their car quickly can choose a loan with a shorter term. While the average loan term now hovers around six years, choosing a shorter term like five years or even three years can help car owners take full ownership of their vehicle sooner and save on interest, too.
Although monthly payments for a shorter-term loan could be higher than payments for a loan with a longer length, car owners will pay less in interest during the life of the loan. In addition, a loan with a shorter term could have a lower interest rate. However, this isn’t always the case as interest rates are largely set based on credit risk.
Understand the Legalities of a Lien
Since most car buyers elect to finance their vehicle with a loan, liens on cars are incredibly common. While car buyers shouldn’t be alarmed to realize there’s a lien on their car, they need to realize the obligations of their loan terms.
Some loans are higher risk to lenders than others, and some lenders have more stipulations related to payment deadlines. Before signing on the dotted line for a loan, buyers should read over the terms and ensure they understand payment obligations, including their monthly payment amounts and the interest rate.
Eventually, most car owners will pay their loan in full and will receive that much anticipated lien release form. At that point, they can elect to re-title their vehicle in their name and without the lien holder attached.
Those who live in a state where the title is held by the lender until the loan is paid in full might want to inquire how the title will be sent to them and when. In addition, some car owners might have several liens on their vehicle (the main loan and perhaps a title loan).
Car owners need to remember that before their vehicle can legally change hands to another individual, all outstanding loan balances must be paid in full. Those who absolutely need to sell their car with a loan (and a lien attached) should reach out to their lender(s) to inquire how to handle the process.
For most car owners, a car lien is nothing more than a legal technicality of having a car loan. However, those who fall too deep behind in payments might find out the hard way that a lien holder can take possession of their car to satisfy the outstanding debt.