What Is a Lien on a Car?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Are you planning to buy a new car soon? If you’ve gone into deep negotiations with lenders and dealers, you might have heard of a car lien. You’ll only get a lien on your car if you finance your purchase. We’ll share some important details about car liens and how they impact your vehicle purchase.

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What Is a Lien?

Lenders take a significant risk by giving you money to buy a car. Not every buyer can keep up with monthly auto payments, and some people default on their loans. If you stop making payments, a car lien lets the lender repossess your vehicle. They will also require you to take out insurance policies for your car, such as comprehensive and collision policies. Some lenders are better than others with their lien policies and interest rates. Auto Approve can connect you with many financial institutions and introduce you to the best choices.

Lenders will remove the lien on your car and give you the title once you fully pay off the loan. Car buyers with zero auto loan debt can pick up their car title in person or wait for it to arrive in the mail.

Types of Liens

  • Consensual Liens: Both parties agree to the lien. Borrowers will have to agree to a lien to obtain financing. The lien comes off after you pay off the debt.
  • Statutory Liens: Courts can put liens on your assets without asking for permission. Lenders won’t invoke legal action against you if you pay your bills on time. Most statutory liens come about because borrowers fell behind on debt.
  • Construction Liens: Construction companies put liens on your property and assets if you fail to pay them for their services. The lien perfectly matches what you owe. If you spent $5,000 on construction work and didn’t pay the workers, the company will put liens on $5,000 worth of assets.
  • Tax Liens: Uncle Sam has many ways to keep people in line with tax payments. The government puts federal liens on your assets if you fall behind on taxes. They can garnish your wages or seize assets if you don’t make tax payments. 

Most of these liens are avoidable. Borrowers incur statutory, construction, and tax liens because they can’t keep up with bills. Tracking your income and expenses will help you create a budget and avoid overspending. Consensual liens are part of doing business with lenders. You can only prevent these liens by paying for the car in full. While paying in full helps you avoid interest rates and liens, it takes more time to accumulate those funds. You may make yourself financially vulnerable in the short term by paying for a vehicle in cash instead of financing your car purchase. 

Why Is It Important to Know About Liens?

Liens give lenders and other entities a claim against your assets. If you don’t keep up with bills, they can use this claim to seize your house, car, and other valuables. Liens reduce a lender’s risk and make them more likely to work with you. Knowing the risks of a consensual lien and how to avoid the others will help you protect your assets. You won’t have to worry about the government knocking on your door because you fell behind on tax payments. Knowing the risks of liens and budgeting accordingly can help you during the tax season and with debt management. 

You can only avoid liens if you pay for everything in cash. It’s challenging enough to pay for a car in cash but even more difficult for aspiring homeowners. You might have to stall important purchases by a decade if you opt to pay with cash. 

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How Does a Lien on a Car Work?

When you buy a car through a lender, you technically don’t own the vehicle. The lender still owns the car and can take it away if you stop paying the loan. The lien is a strong motivator that encourages borrowers to continue making payments. The lender removes the lien and gives you the car title after you’ve paid off the entire loan balance. Some lenders do this automatically, but you should reach out to the lienholder after paying the loan. Car lenders would not issue loans if they couldn’t use liens for financial protection. It gives them financial protection while giving you quicker access to an essential asset.

How Long Does a Car Lien Last?

Car liens last for the length of the debt. A lien will stay on your car regardless of whether you owe $1,000 or $10,000. If you refinance your loan, you will still have the lien. Once you get that debt to zero, you can contact the lender and get them to remove the lien. After the lender removes the lien, they will send you the title to your car. At this moment, you officially own your vehicle and won’t have to worry about liens. 

Advantages of a Car Lien

Liens enable lenders to feel more confident working with borrowers. Lenders will accept a broader range of credit scores and charge lower interest rates on secured loans. Car liens make it easier for borrowers to access financing, and these perk speeds up vehicle purchases. The average price of a new car recently surpassed $47,000. Saving enough money for a car purchase can take years. 

If you spend the money on a car, you suddenly won’t have those funds for an emergency expense. Car liens allow lenders to offer installment loans with monthly payments spread across several years. It’s easier to fit a car into your monthly budget than buy it outright. As a result, you can make a higher down payment or buy a used car to reduce your monthly expenses. Car liens give borrowers and lenders more flexibility in navigating the car market.

Example of a Car Lien

If you buy a car with a lien, your money won’t go straight to the driver. Instead, the proceeds first go to the creditor, who uses the proceeds to repay the loan. After the creditor pays off the loan, the remaining proceeds go to the prior driver. The previous driver never owned the vehicle because of the lien. However, this driver was able to drive the car before selling it.

Where to Find Your Car Lien Information

  • Check With Your State’s Transportation Agency: Some states let you perform online lien searches in your DMV’s database. You can search a car’s 17-digit identification number in this database and see if it has any liens. 
  • Look At Your Car Title: The title may include information about the lien holder. If you have the car title, review it and see if it reveals your lien holder’s identity.
  • Get a Vehicle History Report: A vehicle history report contains information about liens and other details about a car. This report gives you a better understanding of the vehicle’s current status. 

Can You Sell a Car That Has a Lien?

If you want to sell a car that has a lien, you’re in luck. You can conduct a transaction, but the lienholder gets first dibs on the proceeds. After that, they’ll give you the remaining funds after paying off the loan. Let’s say you sell a car for $40,000 and owe $30,000; the lien holder then gives you $10,000 from the sale.  

Where Can You Refinance Your Car?

A car refinance makes your vehicle more affordable, mitigating the risk of losing your ride. You’ll have more room in your monthly budget, and you might also get a lower interest rate. Some borrowers try to get a refinance after raising their credit score. Refinancing can help many borrowers, and Auto Approve delivers. They connect you with banks, credit unions, and other financial institutions. Borrowers can obtain competitive interest rates for their loans and choose from many financial products. Auto Approve handles the paperwork and other tedious details. You can get a free quote for a car refinance and see how much you can save.

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