When a car is purchased with financing from a private party or a financial institution, the name of the lender is entered on the certificate of title as a lien holder. When the loan on the vehicle has been paid in full, the lien holder’s name can be removed from the title and the legal owner can sell the vehicle by completing a handful of documents. If, however, the decision is made to sell a car before paying the lien holder in full, the owner has several options to remove the lien holder from the title and transfer ownership to the new buyer.
Sell Through an Auto Dealer
In most cases, the easiest way to sell a vehicle with a lien is to do the transaction at an auto dealership, particularly if the car is going to be a trade-in. In these transactions, 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 to a private party. 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.
Execute the Sale at the Lender’s Office
Executing the transaction at an office of the lender, if there is one in close proximity to both parties, is the fastest way to pay off the loan, remove the 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. In this process, either the buyer or the seller can transfer funds to the lender to pay off the balance of the loan, and documents can be executed to transfer ownership to the buyer, usually in one sitting. Regardless of the size of the lender, call ahead to ensure that there is someone in the local office to facilitate the transaction.
Lien Paid by the Buyer
If settling the transaction at the lender’s office is not feasible, the buyer can pay the lender directly by using a wire transfer or a cashier’s check to satisfy the lien and then pay the remaining balance to the seller. This option provides an added level of assurance to the buyer through the avoidance of sending all proceeds to the seller, who must then transfer the funds to cover the loan to the lender.
Depending on the laws specific to each state, the buyer may be able to send paperwork related to the sale and transfer instructions along with the payment to receive the cleared certificate of title directly from the lender. If this option is not available, the lender sends the cleared title to the seller. In either situation, both parties must sign the certificate of title to complete the sale and transfer ownership to the buyer.
Use an Escrow Account
Using an escrow account adds an extra layer of security for both parties by having a third party 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.