How to know lien from loan, and what to keep in mind when buying and selling a vehicle
If you’ve been approved for a car loan you’re likely to encounter the term “lien,” but the chances you’ll know what it means may not be quite so great.
A lien on a car is like a safeguard for the lender or other interested party. When you take out an auto loan, a lien is created, which is a lender’s legal right to possession of the vehicle until the loan is repaid.
That means if you default on the loan, like failing to make payments, the lender can repossess the car, which acts as their collateral.
Because the loan is secured against the vehicle, the lienholder can also insist the asset is protected, so the borrower is normally required to take out full insurance coverage – both collision and comprehensive insurance.
With car loans, the lender usually files for a lien with the state department of motor vehicles (DMV), which creates a public record. In some cases, besides being the lienholder, the auto lender may also hold the vehicle title.
When the loan is paid off, the car lien is released. The process for this can vary by state but, generally, the lienholder sends a release document to the state DMV, where the title is updated to show the release and then sent to you. You may receive a copy of the lien release document from the lender, too. You now own the vehicle free and clear.
When buying or selling a vehicle, a lien is something that deserves some attention to ensure there are no surprises after the transaction. Keep these tips in mind.
What to know when buying a car
Buying a brand new car will be straightforward in this matter – you know it’s unencumbered by an existing lien because you’re the first owner. Buying a used car can be different so consider checking if there’s an outstanding lien on the vehicle. Purchasing a car with a lien may mean having to pay off the associated balance yourself, or leave the door open to the possibility of repossession.
There are various ways to check for a lien on a car:
- View the vehicle title for details of any past and current liens. Bear in mind the information on titles will vary state to state.
- Asking the seller for a copy of the lien release document may also help.
- Use the state DMV 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, visit a DMV office.
- Get a vehicle history check with an online provider like CarFax or AutoCheck. Besides revealing any outstanding liens, these reports provide details like whether the car was involved in an accident. There’s typically a charge for such services.
What to know when selling
When selling a vehicle, one option is simply to pay off the balance of the loan to release the lien. That might take place over the course of several months by adding to your normal payment amount to pay off the principal faster. An auto payoff calculator could help to gauge how the figures play out, including what you might save in interest payments. Alternatively, you may want to pay off what you owe in a single payment. You’ll need to get the payoff amount from the lender, and follow their steps for making the payment.
Another option is selling the vehicle to a dealer or private party and sorting out the lien arrangements at the same time. Taking the vehicle to the dealer you want to buy your next car from may be simpler, as they will work with you on the legal and financial steps. Sell your car to a private party and the onus will be on you to make the arrangements with the buyer.
Buying a car? Try financing online
If you’re looking to change vehicles and need financing for a new or used car, consider RoadLoans, the online, direct-lending platform of Santander Consumer USA.
RoadLoans accepts applications from people with all types and credit, whether they want to buy a vehicle from a dealership or private party, and provides instant loan decisions. If approved, you can shop for a car knowing the financing is already covered.
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