If you’re approved for financing to purchase a vehicle, then you’ll probably encounter the term “lien.”
The chances you’ll know what it means may not be so great, however.
A lien on a car is like a safeguard for the lender or other interested party. When you take out the financing, a lien is created, which is the lender’s legal right to possession of the vehicle until the debt is repaid.
If you default on the contract, such as failing to make payments, the lender could repossess the vehicle, which acts as their collateral.
The lienholder can also insist the asset is protected, so the borrower is usually required to get full insurance coverage – both collision and comprehensive insurance.
In most cases, auto lenders will file for a lien with the state agency or department for motor vehicles and will be recorded as the lienholder on the vehicle title.
When the financing is paid off, the lien is released. This process varies by state but, generally, the lender will sign the title and send it directly to you. The next step is for you to contact your state’s vehicle agency to have the lien removed from the vehicle record.
Some states, however, use an electronic lien system, in which case the lender will notify the vehicle agency of the lien release so that the title can be updated before it’s sent on to you.
In each scenario, you now own the vehicle free and clear.
How to handle a lien when buying a car
Buying a car from a dealership is likely to be the easiest option. You’ll know a new car is unencumbered by a lien because you’re the first owner. For a used car, the dealer will have taken care of the paperwork if there was an outstanding lien on a vehicle now offered for sale.
Purchases from private sellers are different so check the lien status before you buy. If the car still has a lien on it, the seller will need to make arrangements to pay off the financing so they can transfer the title to you.
Here are some ways to check for a lien on a car:
- View the vehicle title for details of any past and current liens. Information on titles varies from state to state.
- Ask the seller for a copy of the lien release document.
- Use your state vehicle agency resources. There may be an online service available enabling you to run a vehicle check with the vehicle identification number (VIN) from the model you’re interested in. Alternatively, you could visit the vehicle agency office.
- Get a vehicle history check with an online provider such as CarFax or AutoCheck. Besides revealing any open liens, these reports provide details like whether the car was involved in an accident. There’s normally a charge for such services.
How to handle a lien when selling
There are various possible approaches when selling a car with a lien.
Early payoff
You may want to plan ahead and start paying down the balance on your financing early. You could, for example, add to your monthly payments, pay more regularly or make a lump sum payment.
Use a payoff calculator to see how the figures play out, including what you may save in interest. If you pay what you owe in one go, you’ll need to get the payoff amount from your lender and follow their steps for payment. Once the lien is released and you have the title, you’re ready to transfer it to a buyer.
Trade in at the dealership
Often, the seller will trade in their vehicle at the dealership and sort out the payoff and lien arrangements at the same time. In this case, you’ll still want to check your payoff amount beforehand in order to know whether the trade-in price will cover it.
If it doesn’t, the dealer may offer to roll the outstanding balance into the financing for your new vehicle. Keep in mind that a larger financing amount could result in a higher monthly payment and interest charge.
Sell privately
Selling a car privately puts the onus on you to handle the paperwork with the buyer. When you’ve paid off the vehicle and received the updated title, you’ll need to sign the title release to transfer ownership. Check whether your state requires your signature to be notarized and add the purchase date and the price at which you’re selling the car.
Another option is for the buyer to pay what’s owed on the vehicle to the lender themselves, and any other money required to meet the sale price is paid to the seller.
Some protection for both parties to consider in the private sale process is using an escrow service. This enables the seller to check the buyer’s payment is legitimate and for the buyer to make sure the lien has been released before taking ownership of the vehicle.
Financing for your next vehicle
If you’re looking to purchase or trade in a vehicle, make it easy with Chrysler Capital. Our online financing application takes minutes to complete and we provide instant decisions.
If approved, we’ll connect you with an FCA US dealership nearby where you can shop already knowing your offer amount. The dealership staff will help you select a great Alfa Romeo, Chrysler, Dodge, FIAT®, Jeep®, Ram or Wagoneer model, and work with us to finalize the paperwork. With Chrysler Capital, you can apply, sign and drive the same day.
With 10 years of experience in auto finance, Rob Looker helps car shoppers find the right vehicles with the right financing so they can enjoy the road ahead. When he’s not creating content, he’s often behind the wheel, exploring new places.
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