What Is a Lienholder and How Does It Work?

If you’ve ever financed a car, you may know what a lienholder is. It’s the bank, credit union or car dealership that loaned you the money to buy the vehicle. This information is important because the lienholder, legally speaking, has ownership of your car until you pay off the loan.

Let’s take a closer look at what a lienholder is and how it impacts you and your ownership of your car.

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      What is a lien and who is the holder?

      If you buy a car and pay for it out of pocket, you won’t incur a lien on the vehicle. Most people don’t buy cars like that, however. Instead, the buyer may pay a down payment and the rest of the cost is fronted by a business or organization such as the car dealership.

      Lien is the legal word used to describe the right this person or business has to your property while the loan is active. Lienholder describes their relationship to you. The lien says there is an obligation for you to repay the lienholder. Generally, the lienholder will have their name on the car’s title document until you have paid off the loan.

      In most cases, the lienholder will charge interest on the loan, which also needs to be repaid as part of the loan servicing. This is why you may want to shop around to find the lowest interest rates on car loans before you sign on the dotted line.

      Once the car is paid for, the lienholder should give you a lien release, which is a document indicating you don’t owe any money. This document needs to be sent to your insurer so it can take your lienholder’s name off your policy.

      If I have a lienholder and got in an accident, how should I submit a claim?

      Typically, your lienholder will require you to have a car insurance policy to protect their investment in your car. That may include comprehensive and collision coverage and gap insurance, which would pay the difference between the car’s actual value and the amount owed on it.

      If you’re in an accident, you’ll need to do the following based on your circumstances:

      • Contact your insurance company. After you have talked to the police and the other driver and are safely off the road, talk to your insurance provider. A claims specialist will review the damage to your car and either assess a payment to you for repairs or declare the vehicle a total loss.
      • Make repairs if you can If your car is repairable, the check your insurer gives you for those repairs will have both your name and your lienholder’s name on it. You’ll need to get the lienholder to sign the check before you pay the repair shop. After the repairs are done, your lienholder may require you to supply evidence that the money was used to repair the car, such as a receipt or photos.
      • Discuss the vehicle if totaled. If your car was totaled, contact your lienholder. They will supply you with a letter of guarantee that indicates how much is still owed on the loan. If the car is worth more than you owe, your insurer will pay the remainder of the loan to the lienholder and give you any leftovers. If you owe more than the car is worth, your insurer will pay what they have valued the car at, and you’ll be responsible for anything over that.

      In any case, check with both your lienholder and insurer to see if either have specific instructions for you to follow.

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      Does a lien affect my car insurance cost?

      Probably. If you were hoping to just purchase the minimum required liability insurance in your state, you may be out of luck if you have a lienholder. Liability insurance protects the other driver and their car in the event of an accident, not your own. You’ll need additional coverage options added to your policy to satisfy the lienholder — and that means additional cost.

      The most common additional coverages required by lienholders are collision and comprehensive.

      Collision pays for damages to your vehicle if you are in a collision with another car or cars and you are determined to be at fault at least partly. It also pays if you hit a stationary object like a light pole or if you roll over.

      Comprehensive covers everything else that might happen to a car: theft, fire, falling objects and other non-driving disasters. These two coverages ensure that your lienholder will recoup their expenses if the car, which they partly own, is damaged.

      Some lienholders may require other coverage options, such as gap insurance or uninsured/underinsured motorist insurance.

      Your lienholder will tell you which kinds of insurance it requires.

      Even if your loan is through a private party — say, your dad loans you money to buy your first car — a robust insurance policy is a good idea so that you’d be able to pay him back if anything happened to the car.

      What does it mean to have an outstanding lien on my car?

      An easy way to find out if a car has an outstanding lien on it is to check the car’s title certificate. That should indicate any outstanding loans, unless it was an informal loan from a family member or friend. You may also be able to find out this information by contacting your local DMV and giving them the car’s vehicle identification number (VIN) and the make and model of the car.

      A vehicle history report from a company like Carfax should also show this information.

      Can I buy or sell a car with a lien?

      If you wish to sell a car that you have a loan on, you’ll need to pay that loan as part of the sales process. If you are working through a dealership, it may have existing relationships with local banks and credit unions that can transfer the money they would give you for your car directly to your lienholder.

      You may also handle the sale at the lender’s office so you can have the money directly handed off from the buyer to your lender. If you owe additional money on top of what you’re getting from the buyer, you’ll need to have that amount available.

      A third way of selling a car with a lien on it is to use an escrow account, which is a third party that allows you to deposit the money in a safe location, where it is forwarded on to the lienholder. This adds some additional security for both buyer and seller and will have a small cost associated with it.

      If you are buying a car from someone who has a lien on it, be sure the lien is paid before you complete the sale or you will be responsible for lein. Any of the ways mentioned above can help the process to run smoothly.