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Liens on a Car: Understanding the Basics

What Is a Lien on a Car?

A lien on a car is when the lienholder (the bank or institution you finance your vehicle with) has the legal right to your car until the loan is fully paid off. When buying a car, it’s common not to have the total amount upfront, meaning you’ll need to finance the purchase or borrow the total amount and then pay it off in agreed-upon payments.

Once you repay the loan, the lender will send you the car’s title. You then become the legal owner of the vehicle.

What Is a Lienholder?

A lienholder is a person or company—usually the lender—that holds the title to a borrower’s car. Typically the lienholder is the person or company that financed the car for the buyer, often a private lender, car dealership, or bank.

Essentially, they own the car while the borrower makes payments. If the borrower defaults on the loan, the lender can repossess the vehicle. If the borrower makes payments until the car is fully paid, the lienholder releases the title and ownership to the borrower.

Who Files for a Lien?

Once the borrower finances the car, the lienholder will file a lien for the car’s title. Car owners can add a lien to their car’s title by following the guidelines provided by their state. This usually involves making an appointment with your local tax office and submitting the required paperwork.

In some situations, people who do not own the vehicle can also put a lien on it. If a vehicle needs significant repairs that the owner can’t pay for upfront, a mechanic can put a lien on the vehicle until the owner pays for the repairs.

Types of Liens

In general, liens can be broken down into two categories: voluntary and involuntary. 

With voluntary liens, the vehicle owner allows another party to hold the car’s title. This practice is standard when borrowers lease or finance vehicles. The lender keeps the title until the loan is paid off.

An involuntary lien is placed on a vehicle without the borrower’s permission. A judge might impose this on a vehicle for various reasons, including unpaid parking tickets or repair expenses. In these cases, the lienholders are the people that need to collect a debt.

Consensual Liens

A consensual lien is a voluntary agreement that the borrower consents to when purchasing a car. This is the traditional scenario when a buyer finances a vehicle.

By signing the financial documents, the borrower agrees that the property belongs to the financier until the borrower pays it back. If the borrower falls behind on their payments, the lender can repossess the property.

Statutory Liens 

A statutory lien is involuntary and obtained through court due to unpaid bills. If an owner fails to pay for services and repairs they’ve received, a judge can order a lien to be placed on the property for the amount owed. 

If the person with the lien against them files for bankruptcy, their liability to most debt (including a statutory lien) will be discharged. Bankruptcy, however, does not remove the lien, and the car could be repossessed when the bankruptcy period is over.

Mechanic’s Liens 

A mechanic’s lien is when a mechanic, towing company, or vehicle storage facility places a lien on a vehicle due to unpaid work. If someone doesn’t pay for car repairs, towing, or storage—those facilities can place a lien until their fees are paid in full.

In some cases, a mechanic’s lien may give the lienholder the ability to sell the car to a third party. The person who purchases the car becomes the new owner.

Tax Liens 

A tax lien is placed on a property due to unpaid taxes. The Internal Revenue Service (IRS) must first notify the delinquent taxpayer, informing them that they will add a lien to their property if they refuse to pay the owed amount or agree to a payment plan. 

A single tax lien can encompass the taxpayer’s assets, property, and vehicles. It can also apply to any future assets the taxpayer purchases while in effect. If the debt remains unpaid, the IRS can seize the taxpayer’s property and sell it to pay their debt.

Can I Buy or Sell a Car With a Lien?

Yes, you can buy or sell a car with a lien. To sell a car with a lien on it, you must first contact the lender to determine the exact amount of money needed to pay off the debt. Keep in mind if you sell your car and don’t make enough to cover the loan, you are still responsible for the remaining amount.

You may be able to sell your car to a dealership that will pay off the loan for you—but in these cases, you’ll likely make less money on the sale.

When buying a car with a lien, you should first check with the Department of Motor Vehicles (DMV) to verify the lienholder. You can take over a lien in some cases, but many lenders don’t allow for auto loan transfers. In most situations, the seller must pay off the loan before selling the vehicle to a private party.

Advantages of a Car Lien

Consensual liens, such as a car loan and a mortgage, are considered good to have on record. Paying your balances down in a timely fashion can indicate that you’re responsible with your debt. And, if you make your payments on time, your credit score can improve.

They’re also helpful when you need to purchase a car for work or school and can’t afford the vehicle outright.

How Long Does a Car Lien Last? 

A car lien generally lasts until the borrower pays back the loan. Tax and consensual liens, specifically, are in place until the balance is paid.

The lifespan of a mechanic’s lien varies from state to state. In California and Virginia, mechanic’s liens remain in force for 90 days after the courts grant the lien. In Washington state, they’re effective for 8 months. Meanwhile, mechanic’s liens granted in Florida and Texas expire after a year.

Check with your specific state laws to determine exactly how long your mechanic’s lien is in effect.

How to Obtain a Lien Release 

The responsibility of clearing a lien is up to the owner that incurred it in the first place. Your lender should send your title once the loan is paid off. However, if that doesn’t happen, you can send a lien release letter to your lender.

In some cases, obtaining a lien release can be more challenging. An example of this is if the lender is a company that went out of business since the lien was issued. In this situation, you could contact the Federal Deposit Insurance Corporation (FDIC) for assistance. You can also search for lenders in your state’s Secretary of State database to find out if your lender moved your lien to another company.

How Do I Add a Lienholder to My Auto Insurance Policy? 

You can add a lienholder to your auto insurance policy by informing your policyholder and providing them with any necessary information, such as the lienholder’s mailing address and phone number. Your lender may have specific coverage requirements, and you may have to adjust your policy accordingly.