When you buy a car using a loan or another type of financing from a private party or financial institution, the name of the lender is entered on the certificate of title as a lien holder. A lien is a legal right on some property granted to a creditor, which acts as a guarantee of an underlying obligation, such as the repayment of a loan on a home or a car. If that obligation is not satisfied, the creditor may seize the asset that is the subject of the lien.
When the loan on the vehicle is paid in full, the lien holder’s name is removed from the title and the legal owner can sell the vehicle by completing a handful of documents. If, however, the decision to sell a car is made before the lien holder is paid in full, the owner has several options to remove the lien holder from the title and transfer ownership to the new buyer. Keep reading to learn more about liens and how to sell your vehicle if it still has a lien on it.
- Many people purchase a car using a loan or some other form of financing, which makes the lender a lien holder to the vehicle.
- While the lien holder is not the owner of the vehicle (you are), they have a financial interest in the property.
- If you are unable to satisfy the loan obligation, the lien holder may seize the car that is the subject of the lien.
- If you have an outstanding loan balance and want to sell your car, you will need to satisfy the debt obligation with the lien holder.
- There are several ways to repay a lien and sell your car with a clear title.
Sell Through an Auto Dealer
The easiest way to sell a vehicle with a lien is to conduct the sale at an auto dealership, particularly if the car is going to be a trade-in. Dealers work directly with the lien holder listed on the title, which is usually a credit union or a bank, to facilitate the transfer of ownership.
In this process, the dealer arranges for the full payment of the loan balance by using either the proceeds from the vehicle to be traded in or by adding the payoff amount to the loan being used to buy the new car.
The biggest disadvantage of going through a dealership to sell a car with a lien on the title is that the amount paid for trade-in vehicles is usually less than what can be realized by selling it privately. The process of selling to a private buyer, however, also requires some extra work by the seller. To start, the seller should contact the lender to determine the total amount required to pay off the loan, including any additional fees, to satisfy the debt and remove the lien holder from the title.
Make sure you consult a resource for the value of your car, such as the Kelley Blue Book, before you visit a dealer.
Execute the Sale at the Lender’s Office
This is probably the fastest way to sell the car, pay off the loan, remove the property lien from the title, and transfer ownership. This option is also the fastest way for the seller to collect proceeds from a sale involving a lien on the certificate of title after an agreement has been reached.
Either the buyer or the seller can transfer funds to the lender to pay off the loan and documents can be executed to transfer ownership to the buyer, usually in one sitting. Regardless of whether it's a big or small lender, call ahead to ensure someone in the local office is available to facilitate the transaction. And make sure both you and the buyer are present for the transaction.
Although this may be the easiest option, there are downsides to conducting the transaction at the lender's office. The most obvious is the convenience factor. It may not be the most convenient location for both you and the buyer to attend, which means you and/or the buyer must travel if the office isn't close by—especially if the lien holder is an out-of-state lender.
Lien Paid by the Buyer
If settling the transaction at the lender’s office is not feasible, the buyer can pay the lender directly through a wire transfer or with a cashier’s check. Either of these methods can satisfy a lien and can also be used to pay the remaining balance to the seller.
This option provides an added level of assurance to the buyer. That's because the funds can be routed directly to the lender, which completely avoids the need to send the sale proceeds to the seller, who must then transfer the funds to the lender to satisfy the loan.
Depending on the laws of the state where the sale takes place, the buyer may be able to send the paperwork and transfer instructions along with the payment to receive the cleared certificate of title directly from the lender. If they can't do this, the lender can send the cleared title to the seller instead. In either situation, both parties must sign the certificate of title to complete the sale and transfer ownership to the buyer.
One of the problems with this option lies with the fact that if there are any proceeds left after the loan is paid off, it could take a while for the lender or lien holder to issue a check. For instance, let's say you have a balance of $9,000 on the car. But the buyer agrees to pay you $9,500 for some of the upgrades you've made, such as a new stereo system. It may take some time for you to get your money. That's because you'll be at the mercy of the lien holder issuing you a check for the proceeds.
Use an Escrow Account
Akin to a holding account, an escrow account is commonly used in the real estate industry. But this service can also be used for other transactions like vehicle sales. Escrow accounts involve the use of a third party that holds the money until the transaction is complete. This party is typically neutral and doesn't have a relationship with either the seller or the buyer.
Using an escrow account adds an extra layer of security for both parties because the third party can verify the buyer’s funds, confirm the removal of the lien holder, and facilitate the transfer of ownership to complete the transaction.
The fee for using an escrow account adds an extra expense to the transaction and is usually based on the total amount of the vehicle sale. Because an escrow account protects the interests of both the seller and the buyer, the service fees are commonly split between parties.
Find an escrow service through online searches and reviews, asking friends and families for references, or even checking with dealers and lenders for recommendations.
Both buyers and sellers should beware of fake escrow services, especially if one party is adamant about using a particular one. Once engaged, fraudsters may verify that they've received the funds, assuring the seller that it's okay to release the vehicle. Similarly, a fake escrow company may assure a buyer that the lien is clear and the title is transferred in order to receive payment. This is why it's important to do your research and make sure you're dealing with a reputable agency.
What Is a Lien Holder?
A lien holder is a party that has a legal interest in a piece of property, such as a vehicle.
What Does It Mean When a Car Has a Lien on It?
A car lien acts as a form of security for the lien holder. It allows the lien holder, usually a lender, to possess the property in question if the borrower doesn't fulfill their financial obligation. The person who possesses the vehicle isn't able to dispose of the car without permission from the lien holder.
Can a Lien Holder Take Your Car?
A lien holder can take possession of your car if you stop making payments and default on your loan.
Is a Lien Holder an Owner?
Although the lien holder's name appears on the certificate of title, they aren't actually the owner of the vehicle. By purchasing the car, you become the practical owner, whereas the lender merely has a financial interest in the property.
How Do I Remove a Lien Holder?
In order to remove a lien holder, you must prove that the lien is satisfied. So, if the lien holder is the bank that financed your purchase, you must show proof that you paid off your car loan.
The Bottom Line
Liens may be pesky, but they are a necessary part of the purchase and sale of a piece of property, such as vehicles. Contrary to popular belief, you can sell your car even if you have a lien on it. Although the process can seem cumbersome and you may need to jump through some hoops, you can do so by conducting the sale through a dealer, at your lender's office, or by having the buyer pay the lender directly. You may also consider going through a neutral third party, notably an escrow service to remove the lien so the car's title can be transferred to the new owner.