If you are shopping for a used car and considering purchasing from a private seller instead of a dealership, do your homework and find out whether the car still has a lien on it from a lender. Buying a car with a lien is not impossible, but it can be more complicated because you will need to take steps to ensure the lien is removed before the title is transferred to you.
What a car lien is
A car lien is a contract that serves as a safeguard for a lender if a borrower fails to keep up with auto loan payments. If an auto loan falls into default the lender — also known as the lienholder — can use the lien as a basis to repossess the vehicle. Once an auto loan is fully paid off, the lienholder is released from the loan and the car is now owned outright by the borrower. Because of this, an auto loan is considered a secured loan.
How a lien affects your car purchase
When you’re considering purchasing a car with a lien, you’ll want to ensure that the lien is removed by the time the car is in your hands.
If you’re buying with cash
Start by talking to the current lienholder to determine the total amount due to release the car, as well as other stipulations that might affect the sale. If you are paying cash, you may be able to work directly with the lienholder to pay off the remaining balance yourself.
If you’re buying with a loan
Getting a loan of your own to pay for the car may also work. You can share the details of the purchase with your lender so it can facilitate paying off the lienholder, with the remainder — if there is any — going to the seller. Once the lien has been paid in full you or your lender will receive the title and you’ll be able to register the car in your name.
If the seller pays off the loan before the purchase
The sale can proceed more easily if the seller of the vehicle simply pays off their auto loan and obtains the title before the sale. However, this option isn’t possible for some people with an auto loan, and especially for those who owe tens of thousands of dollars on a newer car or those who owe more than the car is worth.
If, for example, the seller owes $20,000 on a car that sells privately for $17,000, they will still have to pay the lender $20,000 — $3,000 more than they’re getting from the sale. In such cases, the seller may choose to refinance the remainder of the auto loan into an unsecured loan, like a personal loan, in order to have the auto loan discharged.
Make the purchase official
However you handle this situation, be sure to write up a contract that addresses how the lien will be removed or transferred. While it’s not required in all states, it’s a good idea to create a bill of sale outlining the transaction. Make sure that it is dated and signed by both parties, so everyone has a record of the sale.
Also keep in mind that you may be able to use a third-party escrow service to handle the financial side of this transaction. An escrow service will help ensure that the money for the sale is transferred securely. Just be aware that escrow companies charge fees for their services.
The bottom line
There are plenty of instances when people buy a used car with a lien from a private party without encountering any challenges or issues. To ensure the process goes smoothly and avoid any major problems, do your homework and know what steps must be taken to remove the lien. You should also research pricing, line up your own auto financing and get any agreements you make in writing.