Buying a car with a lien
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If you are considering buying a used car from a private seller, find out if the car still has a lien on it from a lender. This can make the purchase more complicated — but not impossible. It will mean taking a few extra steps to ensure the lien is removed before the title is transferred to you.
What a car lien is
A car lien lists the auto loan lender as the primary owner on the title. It is a contract that serves as a safeguard for a lender if a borrower defaults. The lienholder can use the lien as a basis to repossess the vehicle, which is why auto loans are considered secured loans.
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.
How a lien affects your car purchase
When you purchase a car with a lien, ensure that the lien is removed before you finalize the payment.
If you’re buying with cash
When you pay cash, you may be able to work directly with the lienholder to pay off the remaining balance yourself. Start by contacting the current lienholder to determine the total amount due to release the car as well as other stipulations that might affect the sale.
Then negotiate with the seller. They will likely want to sell the car for a profit, but if you know the payoff amount, you may be able to get a good deal — and avoid paying more than the vehicle is worth.
If you’re buying with a loan
Getting a loan of your own to pay should also be relatively simple. You can share the details of the purchase with your lender so it can facilitate paying off the lienholder. The remainder — if there is any — goes to the seller.
Once the lien has been paid in full, you or your lender will receive the title to register the vehicle in your name. Your lender will be listed as the new lienholder until you pay off your loan.
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, especially 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 is still 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.
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 — and set it up with the seller to ensure you are both using a legitimate company.
How to check if the car you’re buying has a lien
Ask the seller — they should be upfront about the car’s ownership status. You can also check the VIN, title and vehicle history report to confirm the seller is being honest.
- Look up the vehicle identification number (VIN) with your state’s DMV. If there is a lienholder listed on the title, the DMV will be able to tell you.
- A title search will also give you information on liens. The National Motor Vehicle Title Information System is a good starting point to find lienholder information.
- Get a vehicle history report as well. Autocheck and Carfax are two well-known companies that list lien history alongside previous maintenance, damage and owners.
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, 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 with a private seller in writing.