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What Is a Lienholder on a Car Title?
Anyone who has ever financed a car is probably familiar with the concept of a lien. The lien on the car title is responsible for protecting the lender's financial interest if the purchaser cannot pay off the full amount of the loan.
At 1803 Capital, LLC, we’ve created a comprehensive car financing guide to help you navigate buying a car. In this article, we discuss what a lienholder is and what that means for you when you finance your vehicle.
The Purpose of Liens and Lienholders
Lenders create a lien on a car title whenever you are financing your car (instead of paying cash in full). What is a lienholder? The lienholder is a lender that holds the legal title to your car until you pay off the loans. It is usually a bank or credit union but could also be a private party like a family member.
Most people don't have cash-in-hand for a new car, so they borrow money to make the purchase. The lienholder uses the car as collateral and possesses a legal claim on it until they receive the total amount back. Essentially, liens and lienholders exist so that people can afford to make large purchases, like cars, while protecting the lender.
Buying and Selling Cars with Liens
A lienholder holds the title to a vehicle through the length of the loan. No one else can legally own that vehicle if the lender still requires payments. You can buy or sell a car with a lien on it. However, be careful exchanging money for a car if the seller does not have the title in hand. You might be stuck paying the remaining balance on a loan you didn't take out.
Suppose you want to sell a car with a lien on it. In that case, it's your responsibility to pay off the outstanding amount before legally transferring the title to yourself and then to the new owner.
Do you need to check to see if a car you're interested in has a lien on it? Although you don't have to worry about liens attached to new cars, a used car can possess one or more liens on it. Legally, a seller must disclose any liens on the car. Check the title or a vehicle history report if you're unsure.
Dealing with Lienholders and Car Insurance
Financing a car requires the lienholder to be added to your car insurance policy. Since the lienholder legally owns the vehicle, they can demand specific insurance coverage to protect it.
Often, full coverage is enough to fill insurance requirements.
Contact your insurance agent to have a lienholder added to your policy. You will need to provide all the information about the lienholder as well as your loan information. Be sure to tell your agent if you need to adjust your policy based on the lienholder's requirements. Your insurance agent will then send the policy information to the financial institution or private party that holds the lien.
If you need to remove a lienholder from your insurance policy, contact your insurance agent and review the policy again to ensure proper coverage.
Navigating a lien doesn't have to be complicated. Paying your loans on time to the lender ensures that you will become the car's legal owner once you’ve paid in full. Failure to pay your monthly payments could result in repossession by the lender to make up for the lost funds.
Remember, you cannot legally transfer ownership of a vehicle, whether you're selling it or generously gifting it, until the lender releases the title. Be sure to review 1803 Capital, LLC's tips to learn more about gifting a car to a family member.
What is a lienholder? We are! At 1803 Capital, LLC, in Metairie, LA, we'll partner with you to get approved for your next car purchase, even without perfect credit. We'll evaluate your loan based on
you, not just the numbers in your credit files. Contact our underwriters today at
(866) 890-2415 and start building back your credit.
