Is there ever a right or wrong time to refinance a car loan? Whether you opt for a new or used vehicle, buying a car can be an expensive endeavor. It’s no surprise, then, that the vast majority of cars on the road today are financed with the help…
Does your car have a lien? Would you know where to begin if it did?
Liens are a common component of the auto finance process. Except it’s easy to forget they exist.
You get a loan to buy a car. You drive it off the lot and take it home. You possess the car and can use it at your leisure. But, so long as there’s a lien on your car, you don’t truly “own” it.
If the day comes that you decide to sell, the process won’t be as straightforward as you’d think. That’s why it’s important to understand liens.
What Is a Lien?
When you borrow money and put up your personal items as collateral, you’re dealing with liens.
A lien is someone’s legal right to an asset. That “someone” is known as the lien holder. Lien holders have the right to repossess your asset if you default on your loan.
Let’s walk through an example.
It’s common for people to take out loans to finance big purchases — like buying a new car. Auto loans are considered secured loans. To “secure” the loan, the lender claims the underlying asset (the car) as collateral.
How? By placing a lien on it.
The loan helps the car buyer afford something they usually couldn’t pay for all at once. But the borrower is obligated to repay the lender. In this case, the lender — like a bank or credit union — is the lien holder.
As the lien holder, the lender has a security interest in the car. It cares about the car’s value. To protect it, the lender could require the borrower to have particular auto insurance coverage (usually comprehensive and collision coverage).
Once the borrower repays the loan, the lien will be released. If the borrower doesn’t repay the loan, the lender can repossess the asset.
But liens come in all shapes and sizes, so let’s outline the various types of liens.
Types of Liens
You’re probably most familiar with car liens and mortgage liens, which are voluntary liens. In other words, you permit financial institutions to place a lien on these assets when you sign a loan agreement.
But liens aren’t limited to these standard loans. There are also mechanic liens, judgment liens, and tax liens. These are involuntary liens, which can be applied to your assets without your permission.
If a lender has a lien on a car, it has the legal right to repossess the vehicle if the borrower defaults on the loan. Depending on your state, the lender may also hold the car title. After the loan has been repaid, the lender will release the lien and the title will update — but we’ll dive deeper into that process later.
Mortgage liens function similarly to car liens. When you take out a mortgage to help pay for your home, the mortgage lender places a lien on the property. If you’re unable to make your monthly payments, the lender can recover their losses by reclaiming or foreclosing on your home.
Contrary to what the name implies, mechanic’s liens don’t only apply to mechanics. A mechanic’s lien can go by many names — including construction lien and property lien. These liens give contractors claims against certain developed or improved property. That includes supplied labor or materials.
For instance, let’s say you refuse to pay a mechanic after they complete a major repair on your car. The mechanic can file a mechanic’s lien on the car, which would make it harder to sell.
In short, if a contractor supplies labor or materials to a project and doesn’t receive compensation for it, the contractor can file a mechanic’s lien on the asset.
Sometimes creditors have to take legal action when borrowers don’t make their loan payments. This is more common for unsecured debt, like personal loans and credit card debt. Since unsecured loans don’t have collateral, the lender doesn’t have a second source of repayment.
That leads them to file a lawsuit if borrowers don’t pay them back.
If the creditor wins the lawsuit, they may be able to place a judgment lien on the borrower’s property — this depends on the state.
The government doesn’t like when people don’t pay their taxes. When this happens, the government can file a tax lien on your assets.
For instance, if you fail to pay your property taxes, the government can place a tax lien on your house. The exact procedure depends on your state, but your house can be sold to recover tax obligations.
Tax liens are no longer a part of credit reports, so they won’t impact your credit score. But don’t think that’s reason enough to avoid tax payments.
Involuntary liens are complicated headaches. So long as you make your payments, they can be avoided.
In that case, you’re more likely to deal with liens related to debt — such as car loans and refinance loans. At this point, you might be wondering, “Does a lien on a car impact your ability to sell it?”
That’s a great question.
Can You Sell a Car With a Lien?
Yes — but you’ll have to take a few extra steps first.
To properly sell your vehicle, you have to transfer the car title to the buyer. However, if your car has a lien on it, your title will reflect this cloudy ownership situation. So, you’ll have to resolve the lien before you can proceed with the sale.
There are several routes you can take to sell a car with a lien, but we’ll expand on the three most common approaches:
- Repay your loan and have the lien released.
- Have the buyer pay or refinance the loan.
- Sell your vehicle to a dealership.
Repay Your Loan
The most straightforward approach to selling a car with a lien is to repay the loan first. The same process applies to a mechanic’s lien. If an auto shop or tow company issued a lien on your vehicle, you’ll have to settle that dispute before you can complete a clean sale.
Once you do, the lien will release, and the title will update to reflect the ownership change. Then you’ll be able to transfer the clear title to the buyer.
Let the Buyer Handle Your Loan
If you need the funds from the car’s sale to repay the loan, you’re not out of options. The buyer might be able to pay the outstanding loan amount or refinance the loan.
First, speak with the lien holder to see if these options are on the table. If the buyer pays off the loan, the lien will release, and they’ll receive the title. You’ll be in the clear.
The buyer could also refinance the loan and become the new borrower. They can’t simply take over your loan because they have to independently qualify. Depending on the buyer’s financial qualifications, they might have different loan terms. Regardless, the name on the loan and the title must match.
Sell Your Vehicle to a Dealership
While you might make more money from a private party, selling a used car to a dealership can ease the burden of dealing with liens. It’s common for dealerships to work with lenders or contractors to remove liens.
Worst case scenario, you can use the dealer’s quote as a benchmark when you market the car to private buyers.
How to Check if There’s a Lien on a Car
If you’re on the other side of the transaction as a buyer, you’ll need to check if a vehicle has a lien on it before you purchase it. Beyond reviewing a car’s physical title, there are a couple of other ways to figure out if there’s a lien on a car.
Some state transportation agency websites have lien search tools. By entering the car’s vehicle identification number (VIN), you can find out if there’s a lien attached to the car.
You can also leverage sites like the National Motor Vehicle Title Information System and CARFAX to generate vehicle history reports. These reports can give you detailed information about a car’s title history, mileage, and serious accidents.
How Are Car Liens Removed?
For auto loans, liens originate when you enter into the loan agreement. At that point, your lender has filed a lien on your vehicle with your state’s Department of Motor Vehicles (DMV) or applicable agency. So, what’s the exact process for removing a lien once you repay the loan?
The process depends on your state. Typically, the lien holder files a lien release to the state’s transportation agency. If your state participates in the Electronic Lien and Title (ELT) system, the state DMV will receive an electronic lien release when you make your final loan payment. Then they’ll send you an updated hard copy of the title.
For instance, South Carolina’s DMV allows lien holders to submit physical or electronic lien releases. Once they receive the lien release document, the South Carolina DMV processes the release the following evening and mails the title.
The Bottom Lien
Liens can cloud the waters of auto ownership. It’s important to understand the basics of liens and the tools at your disposal. This knowledge can help you during the car-buying process and protect you from tricky legal situations.