Buying a car with a lien

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If you are shopping around for a used car and you’re looking at one from a private seller instead of a dealership, you’ll probably need to do some legwork before you make an agreement. Buying a car with a lien is not impossible, but you’ll need to take steps to ensure that the lien is removed before the title is transferred to you. You may choose to negotiate with the seller, pay the lender yourself or consult with an escrow service. Here’s what to know before you make your purchase.

What is a lien?

A car lien is a contract that serves as a safeguard for the lender in the event that you fail to keep up with your auto loan payments. If you skip out paying your auto loan, the lender (also known as the lienholder) can use the lien as a basis to repossess the vehicle. If you pay off your auto loan in its entirety, your lienholder will be released from the loan and you’ll own your car outright. Because of this, an auto loan is considered a secured loan.

How a lien affects your car purchase

If you’re interested in 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. Start by talking to the current lienholder to find out the total amount due to release the car, as well as other stipulations that might apply. If you are paying cash, you may be able to work directly with the lienholder to pay off the remaining balance yourself.

If you took out an auto loan, on the other hand, you can share the details with your lender so it can facilitate paying the lienholder, with the remainder (if there is any) going to the seller. Once the lien has been paid off, you or your lender will receive the title and you’ll be able to get the car registered in your name.

Conversely, the sale can go through more easily if the seller of the vehicle simply pays off their auto loan and receives the title before they sell. However, this option isn’t feasible for most 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 their car is worth.

If, for example, they owe $20,000 on a car that sells privately for $17,000, they will have to pay their lender $20,000 ($3,000 more than they’re getting from you) to sell. In this case, 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.

However you handle this situation, 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 that outlines 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. The escrow service will help you transfer money securely. Just be aware that escrow services that handle car sales charge fees for their services.

The bottom line

At the end of the day, there are plenty of instances where people buy a used car with a lien from a private party without any issues. To make it work and avoid a major problem, you just need to do your homework and know what you’re getting into. Research pricing, line up your own auto financing and get any agreements you make in writing.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
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Student loans editor