Car Liens: What They Are and How They Work

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, - May 25, 2016

Car liens serve as insurance policies for creditors in the event a client defaults. A lien on a vehicle implies that the title of the car is owned by the loan provider until the amount of the loan is completely paid off. While serving as insurance for their loan amount, it also enables the lender to repossess your vehicle if you default on the loan. Liens are essentially proof that you're going to take responsibility for the loan payment, with your car as collateral.

How Car Liens Work

Debt collectors put liens on a vehicle when they're owed money and the debtor isn't making any effort to pay. A lien means that the lienholder must be paid first if the car is sold.

Example: If the vehicle is sold for $20,000 and a debt collector has a $10,000 lien against the car, the debt collector is paid $10,000 and you would receive the balance of $10,000. If you financed the vehicle and still owe money on it, the bank or finance company has the first lien against it – then the debt collector has the second.

The lender then takes possession of the car and your credit history is significantly impacted. In a sense, a lien is a good idea for a person looking to rebuild a broken credit record since it involves a lesser interest rate on the loan.

Buying and Selling a Car With a Lien

If you're looking to buy a vehicle from a third party and not a dealer, exercise extreme caution by studying the paperwork for the car and ensure that there are no liens on the vehicle.

The length of a lien on a car title lasts for as long as there is an outstanding loan balance on the vehicle. If you have a lien on your car title, you need to ascertain how much the outstanding on the loan is and pay it in full. You then need to contact the lienholder and get the lien removed from the title. If you owe even the slightest amount, they have the right to repossess the vehicle and demand payment.

Fortunately, you can still sell a car that has an auto lien. Keep in mind, while there's a lien on a vehicle, the lienholder has the first right to any money received on the car and it cannot be sold until they're paid. The buyer can write two checks – one to the bank or finance company for the loan balance and one to you if they're paying you more than the loan payoff amount. The bank or finance company would then transfer the title to the buyer.

The Bottom Line

Now that you have a better understanding of what car liens are and how they work, are you ready to finance your next vehicle? CarsDirect matches consumers with less than perfect credit to dealerships near them that know how to handle unique situations.

Get started on the path to your next auto loan by filling out our online car loan request form. Our service is free, fast, and doesn't put you under any obligation, so you can get started with confidence today.

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