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How to sell a car with a lien

Fact-checked with HomeInsurance.com

When buying a new car, many people choose to finance their purchase with a loan, rather than paying for the car in cash. A car loan is also referred to as a lien. It’s an agreement between you and your lender that says you will make monthly payments of a predetermined amount until you pay off the entirety of the loan.

The lender, also called the lienholder, technically owns the vehicle while you’re making the payments. Only when you pay off the loan in full do you become the legal owner of the car, and the lien is removed from the title.

However, there are some situations when you might want to sell your vehicle before the lien is paid in full. Maybe you’re moving to a city that has public transportation, or the cost of owning a car was becoming too expensive.

It’s not illegal to sell a car with a lien, and there are no penalties for doing so, provided it is handled correctly. There’s one major requirement; you must pay off the loan in full and have the lien removed from the title before you can legally sell it to another buyer. There are a few options for doing that, which we’ll discuss later on.

Selling a car you own outright is much easier than selling a car with a lien. However, it’s entirely possible if you are prepared to cover the associated costs. Below are the steps you need to take to sell a vehicle with a lien.

Steps to sell a car with a lien

Determine your payoff amount

If you have a loan balance, you’ll need to pay it off before the lien can be removed from the title. However, the amount you have to pay off is not just the outstanding balance on your statement. 

The total amount owed is called the payoff amount, and it’s different from the loan balance on your statement. Because of interest over time, the payoff amount includes the full amount owed to the lender. Your lending company can give you a quote for the payoff balance.

Start selling

The next step is to actually begin the process of selling your vehicle. This can include taking the car in for service, checking that all systems are running smoothly, and making any necessary repairs. Regardless of who you’re selling the car to, you’ll get an offer based on the condition of the car. It’s typically worth investing time and money to get the car serviced, washed and detailed before showing it to potential buyers. 

When it comes time to sell the vehicle, you have a few different options. Because under a lien, you can’t simply hand over the title and collect payment from a random buyer, you can either sell the car through an auto dealership or sell it privately. 

Selling through an auto dealer

If you’re planning to trade in the vehicle for something different, the best option is to sell the car through an auto dealer. Here’s how that works: when you purchase a new vehicle from the dealer, they will use the proceeds from the trade-in to pay off your loan, or add the payoff amount to the loan for the new car. The dealership will work with your lender to transfer the title from the lienholder’s name to the auto dealership.

There’s really no work on your end. The dealer will make all the calculations for you and arrange the title transfer with your lending company. However, the downside to this option is that you’ll typically get less money trading in a car than you would selling it to a private buyer.

If you decide to trade in your old car for a new one, make sure you’re squared away in terms of car insurance. You might need more or less coverage than you had for your old car, so it’s a good idea to have a conversation with your insurance provider before finalizing the trade. 

Selling your car with a lien privately

The other option is to sell your car to a private buyer. In this case, the selling process is the same as any other car. You find the buyer, show them the vehicle, and agree on a price. But before you can give them the title, you need to pay off the loan and sort out the selling details.

Sort out selling details

If you’re selling your car to a third-party buyer, you can’t legally transfer the title without paying off the loan first. The fastest and easiest way to do that is to visit your lender’s office with the buyer to pay off the loan, remove the lien, and transfer the title to the buyer. Usually, you can complete the transaction and transfer the title in one appointment. 

The other option is for the buyer to pay off the loan. Most lienholders accept a check from the buyer for the payoff amount in exchange for the title of the vehicle. Even when you take this approach, you will need to visit the office of the lender with the buyer and complete the payoff process. 

It might seem easy to have the buyer pay off the lien, but remember that the price of the vehicle will go down significantly in this case and you have to agree to an amount lower than the actual value of the car. Another downside is that if the buyer and the seller are from different regions and the lender does not have a nearby office, this process can be cumbersome.

Consider an escrow 

If you or the buyer don’t live near the lending office and can’t complete the transfer process in-person, consider an escrow account. With an escrow account, both parties have the assurance that the payment will be duly completed once the lien has been paid off. Most lenders and banks have the option for an escrow account, where the money from the buyer is held until the loan has been paid off by the seller and the title has been transferred. 

An escrow is often used when there are contractual agreements that need to be met until the sale can be closed. Instead of writing a check, the buyer deposits the money in the escrow account until the paperwork is complete. If the deal does not go through, the money is returned to the buyer. The escrow is the third party with the right to verify funds, confirm the satisfaction of the lien and enable the transfer of the title.

Using an escrow account does come with a fee, which is either a flat fee or based on the total sale price. However, since the account provides financial security for both the buyer and seller, the fee is usually divided equally between both parties. Who pays the escrow fees is a decision you have to make with the prospective buyer before you can proceed. If you are the buyer, it is necessary that you perform your own research into escrow accounts to make sure you don’t end up putting money in a scam account. Both the parties should tread with more caution if the sale is private without the involvement of a dealership.

The takeaway

  • It’s perfectly legal to sell a car with a lien, as long as you pay off the loan first.
  • To sell a car with a lien, you have the option to sell it to a car dealer as a trade-in, or sell the car to a private buyer.
  • Either way, you are responsible for paying off the loan in full, and working with the lending company to transfer the title to the new buyer.

The prerequisite to selling your car under lien is paying off the loan in full first. You can either sell the car to a dealer and trade in for a new vehicle, or sell the car to a private buyer. With a trade-in, you can work with the dealership to assist in the sale and transfer of the title, or you can work with your lending company to pay off the loan, remove the lien from the title, and transfer the title to the new owner.

Lienholder FAQ

How long does it take for the lien to be released?

Once the loan has been paid off and the required paperwork is complete, the lien is released within one business day and then the title can be transferred to the buyer. 

Is the lienholder the owner of the vehicle?

No, the person purchasing the vehicle is the rightful owner, although the lienholder’s name does appear on the title. The lienholder is simply financing the purchase.

Do I need a new title once the vehicle transfers ownership?

When the loan has been repaid in full and the lien released, the title of a vehicle can be transferred to a new owner. A new title is not necessary; having a letter of lien release attached to the title is sufficient.

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