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“Lien” is one of those banking terms that banks and dealerships throw around left and right. But, even though people hear it all the time, many still don’t actually know what a car lien is, how it works, or how it affects your day-to-day life. This article will answer all of those questions and more.
What Is a Lien?
A lien is a safeguard for the lender who gave you the money to purchase your car. If you bought a car entirely with your own cash, odds are there’s nobody who holds a lien on it. However, most of us don’t have that kind of money on hand, which means most of us have some kind of lien to deal with.
These safeguards are designed to help lienholders avoid being scammed or taken advantage of. The lienholder’s name will typically be added to the title along with the names of whoever bought the vehicle, so that everybody knows they have a stake in the vehicle until the purchaser’s debt to them is fully paid off.
How Does It Work?
Liens work similarly to other forms of secured loans. That is, until you fully pay off the vehicle, the lienholder has the right to take it back from you. For example, if you fail to make payments on your new car, the lienholder can have it legally repossessed. This acts as insurance for the lienholder against the purchaser’s nonpayment, preventing con artists and insolvent individuals from getting shiny new cars at the expense of other people.
Types of Liens
There are two common types of car liens in the United States. These liens apply in different ways depending on your state’s titling laws. Although they can appear differently in each state, they do tend to be based on the same general legal definitions. Those legal definitions are as follows:
Consensual Liens
A consensual lien is a lien that you consensually agree to. These kinds of liens are entirely voluntary and you have the right to choose not to enter into such a lending agreement if you don’t want. This is the most common type of lien in the world of cars and other vehicles. That’s because this is a type of lien that is enforced as a result of taking out a car loan.
If you have a consensual lien on your title, then you are legally considered to have agreed to the loan terms and conditions and to be in agreement with the repayment requirements of that loan.
Statutory Liens
A statutory lien is a lien that was forced upon you as a result of a judicial process. These liens can be added to your record because of unpaid bills, civil judgements, and many other circumstances. If a lien is applied to your record because of court actions, then it is likely that said lien is a statutory lien.
Buying or Selling a Car with a Lien
When a person holds a lien on your property, they are technically considered the legal owner of that property. So, when you take out a car loan and enter into a consensual lien, the lienholder who gave you that loan is the legal owner. You cannot sell, trade, or otherwise exchange the vehicle with anybody else until you have paid the lienholder back and had the lien removed.
In order to legally sell a car with a lien on it, you must first pay off that lien. The standard practice for handling this process is to use the money obtained from the buyer to pay off the lien. Unfortunately, if the buyer does not buy your car for equal to or more than the value of the lien, you will have to pay the remaining balance out of your own pocket.
The same goes for buying. If somebody is selling a vehicle that you want to buy but it has a lien on it, the seller will quite likely ask you to pay at least as much as the remaining balance on the lien. That’s because, until that lien is fully paid off, ownership of the vehicle cannot be transferred to you.
Note that there are some locations where it is possible to transfer liability of a lien and therefore to sell a vehicle without first paying off the entirety of the lien. However, this is not common.
Where Can I Find Lien Information?
If you’re looking to purchase a vehicle from a friend, stranger, or anybody who isn’t working at an official dealership, then one of the first things you’ll want to do is check whether that vehicle currently has a lien on it.
Start by requesting information on the vehicle from your state’s Department of Motor Vehicles (DMV) or equivalent agency. For example, in New Jersey, you should contact the Motor Vehicle Commission (MVC) instead. Requesting information from such an organization may take some time, but it tends to be one of the most accurate methods of determining whether a vehicle currently has a lien on it.
If that doesn’t work, you should request a copy of the official title from the seller so that you can review it. Any liens on the vehicle should be listed on the vehicle’s title. If they refuse to show you the title, then it’s possible that they are scamming you. Reputable vehicle salespeople will always allow you to review the vehicle’s paperwork prior to making a purchase.
A third way to obtain lien information on a vehicle is to request a vehicle history report from a company like Autocheck or Carfax. These companies maintain detailed records of government and private data that can be used to identify if there are any liens on the vehicle, who they’re from, and more.
Many vehicle history reports will also show you key details about the vehicle, such as whether it’s been involved in any car accidents and what its maintenance history looks like. Whether you’re looking for lien information on the vehicle or not, obtaining a vehicle history report can provide invaluable insight into your car-buying situation.
What Happens to My Car Title after the Loan Has Been Paid Off?
When a lien is paid off, the lienholder’s information is removed from the title. In other words, paying off a lien in full results in you becoming the full legal owner of the vehicle.
Who Files for a Lien?
When purchasing a new or used vehicle from a dealership, the dealership staff will typically file for a lien on your behalf. When purchasing a vehicle from somewhere else, you may have to fill out the titling paperwork yourself.
