Car Liens: What They Are and How They Work

Car liens serve as insurance policies for creditors in the event a client defaults. A lien on a car implies that the title of the vehicle 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 car if you default on the loan. Liens are essentially proof that you are going to take responsibility for the loan payment, with your car as collateral.

Debt collectors put car liens on a vehicle when they are owed money and the debtor is not making any effort to pay. A lien means that the lien-holder must be paid first if the vehicle is sold.

Example: if the car is sold for $20,000 and a debt collector has a $10,000 lien against the vehicle, 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 vehicle 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.

If you are looking to buy a car 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 holder and get it removed from the title. If you owe even the slightest amount, they have the right to repossess the car and demand payment.

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

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