What Is a Lienholder on a Car Loan?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - December 28, 2020

When you finance a vehicle, your lender is the lienholder. Your title lists you as the owner of the car, along with them. What’s the purpose of listing the lender as the lienholder on the title, though?

Your Auto Loan and Your Lienholder

If you’re financing a vehicle, you have a lien on the title and your lender is the lienholder. The two main purposes that liens have are:

  1. Gives the lender ownership rights to the property, stopping the borrower from selling the car legitimately unless they pay off the loan in full.
  2. Allows the lender to repossess the property if you default or break the loan contract.

Once you complete the loan, the lien is removed from the title. You receive a release of lien letter that allows you to get a new title with just your name on it. Or, you can just keep the release of lien letter with the title that proves you completed the loan.

If you can’t sell a vehicle until the loan is paid off, how do people sell their cars when they have a lienholder?

Selling a Car With a Lien

Selling a vehicle when you’re still financing is easier than you might think. Your biggest concern is getting a buyer to offer enough money to pay off your loan. Once you get that check, you send it to the lienholder who can then send a release of lien letter.

If you owe less on the car than what its value is, it’s called having equity. This means you have a good chance of getting a sale offer from a private buyer, or trade-in offer from a dealer, that’s more than what you owe on the loan. You can either pocket the money that’s leftover after paying off the loan, or use it to put toward your next vehicle purchase.

Equity is commonly used to lower the price of the next auto loan. You can trade in your financed car, get an offer from the dealership, and the dealer sends the money to your lender to release the lien (if the amount is high enough). The extra money from the offer can be used to lower the selling price of your next vehicle. Or, you can privately sell your car and keep the profit and use it as a down payment.

Some borrowers have enough equity in their vehicles to where they can sell it and don’t need any extra cash down to qualify for an auto loan.

If you have less than perfect credit, having a trade-in with equity is extremely useful if you’re applying with a dealership’s lender. Nearly every bad credit lender requires a down payment, usually at least $1,000 or 10% of the next car’s selling price.

However, cold, hard cash isn’t the only acceptable form of down payment – trade-in equity counts, too. If you have cash in hand for a down payment, and a trade-in with equity, you can significantly reduce the amount you need to finance for your next auto loan.

Ready to Upgrade Your Ride?

Trading in your vehicle can be a pretty painless process since experienced dealers handle them all the time. Trade-ins are very common, and borrowers often use them to lower the amount they're borrowing to make their next car purchase.

If your credit score isn’t great, you may think that your chances of getting approved for an auto loan are slim, and you’d be partially correct. Many traditional car lenders require good credit scores to qualify for financing. But there are lenders that assist bad credit borrowers: subprime lenders.

These indirect lenders are signed up with special finance dealerships, and they're equipped to assist borrowers in tough credit situations. Finding a special finance dealer can require some legwork, but we want to make it easier.

Here at CarsDirect, we have a network of special finance dealerships all over the country, and we want to help you get connected to one near you. Get started by filling out our free auto loan request form, and we’ll look for a dealer in your local area with bad credit lending options.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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