What Is a Lienholder?
Fact-checked with HomeInsurance.com
A car is one of the most expensive purchases many people make. You might not have enough cash to pay for your car in full at the time of purchase. That’s where car loans come in. With this form of financing, you can get a new (or new-to-you) vehicle without draining your savings.
But, of course, the lender who finances your car purchase wants some guarantee the financial backing it’s providing will be repaid in full. When you purchase the vehicle, you’ll list the lender on the title as a lienholder. This means it has a financial interest in your car and, should you fail to make your car loan payments, can seize the vehicle from you.
While the relationship might seem straightforward at first, some complexities do come into play. Your lienholder has a say in the auto insurance coverage you buy since it needs a way to protect its vested interest. A lienholder can also impact your ability to sell your vehicle if you haven’t fully paid off your loan. We built this guide to teach you everything you need to know to understand your lienholder and how to navigate working with your lender.
What is a lien?
Technically, a lien is a right to a property (in this case, your car) granted to the individual or entity which financed the property’s purchase. What is a lienholder, then? The individual or entity that provided the financing is called your lienholder. Your lien is effective until your debt to your lienholder is repaid in full.
If you take out a car loan, your lienholder is the person or group that funded your loan. Usually, the lienholder is your auto dealership or a financial institution like a bank.
When you buy your car, your lienholder is listed on the title. That’s because it has partial ownership of the vehicle while your loan is outstanding. If you fail to make the payments on the car loan provided, your lienholder can seize the vehicle from you. Additionally, it can dictate how much auto insurance you need to buy to protect the car.
Do I have a lienholder if I lease a car?
No. If you have a car loan, you have a lienholder, meaning someone provided you with that car loan and has an interest in your car until you pay it off. But when you lease, you’re not buying a car. Instead, you’re making regular payments toward what’s essentially the long-term rental of the car.
That said, a lessor (the organization behind your lease, usually the dealership) and a lienholder are similar in that it also has certain rights to your car. For example, some car lessors will dictate that you can only drive the vehicle a certain number of miles during each lease term, or you’ll incur additional fees. Carefully read your lease to understand your lessor’s rights to the car you plan to drive.
How does a lien affect my insurance?
The vast majority of states require two forms of auto insurance: bodily injury liability and property damage liability. But these only cover injuries to others or damage to their property, like their vehicle. If you only have bodily injury and property damage liability insurance, you don’t have protection for your ride.
Because your lienholder has a vested interest in your car, they usually require you to get additional coverage to protect the car. The most common types of coverage lienholders require include:
- Collision coverage: This is protection for your car should you get into an accident. While the property damage liability portion of your auto insurance policy pays for damage you cause to other people’s vehicles, you need collision coverage if you want your insurer to pick up the tab for damages to your own car if you’re found at-fault in an accident.
- Comprehensive coverage: Your car’s exposure to risk doesn’t stop when you put it in park. Comprehensive coverage protects against non-driving risks like the theft of your car, vandalism, or a tree branch falling on it.
- Gap coverage: Short for guaranteed asset protection, gap insurance is a type of coverage that steps in when the insurer assesses an actual cash value (a current value) of your car that’s less than what you owe on your car loan. Without this type of coverage, if you total your car, your insurer might cut you a check that’s less than the amount still outstanding on your car loan, leaving you with money to pay and no ride to show for it. With gap insurance, that difference is covered — and you can pay your lienholder in full without excess financial strain.
How to find out if a car has an outstanding lien
If you have a car loan, it’s safe to assume your car has an outstanding lien. But if you’re considering buying a car from a private party, you’ll want to know if the car has a lien against it first. If it does, you wouldn’t be buying full ownership of the car when you purchase it. Instead, you’d share ownership with the lienholder until the loan is paid in full.
You can check if a car has a lien against it by asking the current owner to see the original Certificate of Title. The lienholder will be listed on the title.
If the owner can’t or won’t provide the original title, get the car’s vehicle identification number (VIN). Usually, this number is printed on the driver’s side dashboard (look through the windshield while standing outside the car to find it) or on the driver’s door pillar.
If your state’s DMV offers vehicle history reports (VHRs), you can use that VIN to learn if there’s a lien against the car. If not, you can use services from companies like Experian or CARFAX to get a comprehensive report on the car, which will list any outstanding lien.
How to buy a car with a lien
Just because a car has a lien against it doesn’t mean you can’t buy the vehicle, or even that you shouldn’t. But when buying a car with a lien, you should expect a few extra steps to either get the lien discharged or to refinance it into a private loan so the car seller can take the debt and you can take the vehicle.
The cleanest and probably easiest way to buy a car with a lien is to meet the car seller at the lienholder’s office. There, you can split the amount you agreed to pay toward the car. Say you agreed to buy the car for $8,000 but the outstanding car loan totals $6,000. You can pay the lienholder $6,000, discharging the lien so you can get a clean, lienholder-free title while giving the car seller the other $2,000.
If you can’t meet at the lender’s office, you can also arrange to wire the lienholder the outstanding balance while giving the remaining money to the car seller. Or you can give them the full lump sum under the agreement that they’ll pay off the car loan with a portion of it, but make sure you get everything in writing if you go this route. Both of these options can get a little complex, though. You might want to consider involving an escrow company to hold your money, pay off the remaining car loan, then distribute what’s left to the seller.
How to sell a car with a lien
If you have an outstanding car loan but want to sell your vehicle, review the options we laid out for people interested in buying a car with a lien. Those are your best paths for selling your car to a private party.
You can also sell your car to an auto dealership. If the sale proceeds from your car will be enough to cover your car loan, the dealership usually arranges to pay the loan on your behalf. If not and you’re buying a car from the dealership, they can add the payoff amount to the new loan on the vehicle you’re purchasing. Either way, you can get your lien discharged as you sell your car.
Filing an auto insurance claim with a lienholder
Because your lienholder is listed on your car’s title, it will also be listed on your auto insurance policy. When you file a claim, the check your insurer makes out may be directed to both you and your lienholder. That means you’ll need to work with the lienholder to get your check endorsed so you can cash it, and the lienholder may have stipulations about how you use the money. Specifically, it may want proof the money you got from your insurer went to repair your car.
To best protect yourself in this situation, save every piece of documentation related to your insurance claim and the repair of your vehicle. Take pictures of your car before and after repairs and save all of your receipts so you can show your lienholder you used the insurance money to restore your vehicle.
When you take out a car loan, the entity behind that loan — your lienholder — gets partial ownership in your car until your loan is paid off. That means it can:
- Dictate how much insurance you buy for the car
- Ask for proof you used money from an insurance claim to repair your car
- Play a role when selling your car
If you’re interested in buying a car with a lien, it’s helpful to explore all of your options so you can find the easiest and most affordable way to get the lien discharged before you take ownership.
Ultimately, a car’s lien is something to take into consideration, but it shouldn’t be a deal-breaker when selling or buying a car.