A car lien is the lender's right to your property. It’s your lender's "insurance policy" to ensure that they’ll be covered if you aren't able to continue paying your loan.
While that may sound a little unnerving, car liens are a normal part of the car buying and selling process.
If you’re in the market for a new (or used) vehicle,
car insuranceis a must—and your lender will likely require more than just the state minimum.
Read on to learn more about car liens and what they mean for you.
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What is a car lien?
A lien is a legal protection given to lenders in the event you default on your loan. Your lender has the right to take action against you if you don't pay your debt. They may seize the vehicle and sell it to pay off the loan.
Let's say you buy a car from a dealership and sign up for financing, which means the bank loans you money to pay for your vehicle. Therefore, the car is "paid for" by the bank and they are granted a lien until you pay off the loan in full. The car is security just in case you fail to pay the
As long as you have a balance on your car loan, your lender is legally the rightful—if partial—owner. A lien is a part of your public record and can be accessed by anyone searching for that information.
Key Takeaway A car lien gives your lender the right to your car until your loan is fully paid.
What happens to the car title after the loan is paid off?
After you've paid off your loan, the lender files a lien release. The lien release will update the title and transfer full ownership to you.
Your title is now clear and you are the sole registered owner of your car.
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Can you sell a car with a lien?
You must pay the loan in full before you can sell a vehicle.
If you sell (or
trade in) your car to a dealership, they can handle the paperwork of the lien release and title transfer. They will work with the lender so you don't have to. If the money from the trade-in doesn't satisfy the full loan amount, the dealership will add the remaining balance to your new car loan.
If you choose to sell privately, contact your lender to get the full amount to pay off your debt. Double-check to make sure there are no extra fees and adjust your asking price accordingly.
You can either pay the loan in full yourself or your buyer can pay the remaining balance directly.
Key Takeaway You’ll need to pay the loan in full before you can sell a car with a lien.
Should I buy a used car with an existing lien?
If you buy a car with an existing lien, the seller must pay off the loan in full before they can transfer ownership to you.
Do your homework and check out the status of the lien. If you want to move forward with the purchase, get written proof from the lender that the seller has fully paid the loan and the lien has been removed.
Key Takeaway Do your homework before buying a car with an existing lien.
What is a lienholder?
The lienholder is the lender that has the legal right to your property. This can be a bank, car dealership, or private lender.
Until you pay off the loan, your car title will include both you and the lienholder as registered owners.
Types of liens
There are four different types of liens that could be on your vehicle.
A consensual lien is a lien that you agree to. You give the lender permission to file the lien against whatever property is involved.
Common examples of consensual liens include mortgages and car loans.
A statutory lien is created by court action, regardless of your consent, and gives the creditor security through property. This is typically the result of unpaid bills.
A construction lien is filed if a contractor does work on your property and you fail to pay them. The lien will be taken against your property for the amount owed.
A tax lien is the government's right to claim your property if you don’t pay your taxes. This can affect real estate or any other asset that is past due on taxes. Failure to pay a federal tax lien can result in the government garnishing your wages or seizing your property and other assets.
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How do you get rid of a car that has a lien on it?
You can sell or trade in the car. But remember: the loan has to be paid in full first. Sell the car and use the money to pay the rest of the debt or trade the car in and add the remaining loan amount (if any) toward your next car purchase.
What happens if I buy a car with a lien?
The loan must be paid in full so that you can get the car title. It is the seller’s responsibility to ensure that the loan is paid off and the lien on the car title is removed.
Is a lien on a car bad?
No—liens are a part of the financing process of buying a car. As long as you continue to pay your lienholder and don't default on your payments, it's a smooth process!
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