Regresar al GuidesNot everyone can afford to buy a new car outright with a single payment. If you cannot pay for your next set of wheels in full on the day you buy your vehicle, then you may choose to finance the car with a loan.
An auto loan carries a car lien, a legal claim on your vehicle until you have fully settled the outstanding balance. During the lien period, the lienholder will technically own the vehicle until you have fully paid the auto loan.
But what happens if you want to sell your car and the loan isn't paid up yet? We look into selling a car with a lien as well as buying a car with a lien and how to complete the process the right way.
Buying a Car with a Lien
Buying a car with a lien is a little more complicated than selling a car with a lien because you may not be able to:
- Transfer the title into your name.
- Take out car insurance or register the vehicle in your name.
- Obtain an auto loan for the purchase of your new car.
- When signing the official bill of sale, always ensure the seller discharged any existing liens. If there is an outstanding lien in place when purchasing a vehicle outright, the lienholder could repossess your vehicle despite there being no fault of your own.
To find out if there is a lien on your future vehicle purchase, you can do the following:
- Check the vehicle's current Certificate of Title: Ask the seller to produce the car's original title papers. A lien listed against the car will appear on the title.
- Check for an existing lien with your lender: If you are taking out an auto loan, contact your loan officer with your potential purchase's vehicle identification number (VIN). They will be able to see if there is a lien against the car.
- Run an online vehicle history report (VHR): Run the VHR using the vehicle's VIN through several online websites, such as CarProof and CarMax.
- Run a search for a lien with the state DMV the vehicle is titled in: Go online to the state's DMV website do a lien search for free.
How to Buy a Car with a Lien
Step 1: The seller needs to get the paid loan discharged
Even if the seller settled the loan in full, it is possible that the lien was not discharged. The seller will need to contact their lienholder to obtain a Confirmation of Ownership to ensure the transfer of ownership occurred.
Step 2: Have the seller re-finance the amount owed
If there is an outstanding balance on the car loan, the seller can choose to re-finance the amount as a personal loan or on a line of credit that will not consider the motor vehicle as collateral.
The seller needs to discharge the auto loan before you complete the purchase.
Step 3: Re-negotiate the purchase
Sit down with the seller and agree to pay the financial institution directly for the outstanding loan amount after negotiations. The seller will receive the balance of the funds not owed to the institution.
Always ensure there is a written agreement in place. Should the seller decide to back out of the deal at the last minute, then you will be out of money without a contract binding both parties.
If the seller refuses to remove the lien from the vehicle, rather walk away from the sale.
Selling a Car with a Lien
If you want to sell your vehicle with a lien on the title, then the first thing you need to do is contact your lienholder. Ask your lienholder to give you the exact amount required to pay off your car loan so that you can determine precisely how much money you need to close the sale.
If you plan to sell the car to a private party, discuss the private sale with the lender and establish the right process to follow to pay off the loan and complete the title transfer to the new buyer.
Before listing your vehicle for a private sale or visiting a car dealer, always do your research. It is important to know exactly how much you owe on your car. If you have had your vehicle for a short period of time, you may have a challenging time selling your car compared to someone close to the end of their car loan.
It is always a good idea to compare different dealerships and potential buyers to see who will offer you the best deal. Check out the Kelley Blue Book to find out the value of your car to make negotiating the sale price easier.
Selling a Car with a Lien to a Dealership
If you plan to trade in your car at a car dealership, the dealership may assist you with the transaction by paying off your car loan as part of the trade-in. In this case, the dealership will handle the title transfer so that you don't have to.
It is much easier to trade in your car at a dealership instead of selling it to a private buyer; however, you may find yourself getting less money for your car. Remember, a dealership will resell the car since they are a car dealer, so they need to buy for less to profit from your car's future sale. This is why you would typically get less money for your trade-in than if you were to sell your car to a private party who is most likely keeping the vehicle for their own private use.
If your loan is upside down and the payoff amount is more than the trade-in value of your vehicle, then prepare yourself to pay the difference between the loan balance and the amount the car dealer gives you for your car.
The dealership may offer to settle the total amount you owe on your auto loan; if they do, confirm how they intend on settling the payoff amount. If you trade your car in, you need to ensure the dealers aren't just adding your outstanding balance to your new loan, which will cause a significant increase in your monthly repayments to the financial institute or lender.
If you trade in your old car for a new car, ensure you are squared away in terms of your car insurance. You may need more or even less coverage than you had for your previous vehicle, so it is recommended you speak to your insurance provider before finalizing the trade-in.
Selling a Car with a Lien to a Private Buyer
Should you decide to sell your car to a private party, then the process is different and may require some additional steps than if you were to trade it to a dealership. A private sale takes more time, but you may be rewarded with more money for your motor vehicle since it is a private individual buying your car and not a dealership.
To complete the private sale, you will need to pay off your auto loan first. If your lienholder allows, you could also have the buyer pay your monthly installments on the auto loan for you.
Below are your options in a little more detail for selling your vehicle privately and transferring the title:
- Pay the Balance Yourself
If you can afford to pay off the outstanding balance in full, then the lender will send you a lien release document (depending on the state you live in) to the state transportation agency or DMV. This is so the car title can be updated and transferred to your name. Once you have the new title, you can transfer the vehicle to the vehicle's new owner.
- The Buyer Pays Your Auto Loan
The lienholder may allow a check from the buyer for the payoff amount on your car in return for the car title, especially if you cannot afford to settle the amount yourself. To simplify the process, go to your lender's office with the buyer to complete the transaction.
If going together to the lender's office isn't possible, then consider an escrow service for the sale process. Set up an escrow account where the buyer can pay the money into. The funds will be held for the buyer until they receive the car title. The escrow service will handle all the paperwork for the transaction and ensure all conditions of the sale are met before the buyer's funds can be released to you.
What is a Car Lien?
A car lien is basically an insurance policy for lienholders or lenders. If a financial institution is going to assist you with finance for your new or used car, then a car lien protects them in case you default on your payments. The vehicle you buy will have a lien on the car title until you fully pay off the loan balance.
Not only does a lien act as insurance for a lender, but it also allows a creditor to repossess your vehicle should you default on the car loan. Basically, a lien is a right against property or a legal claim to that property. If you make the minimum required monthly payments against your loan or miss your payments, your car could be repossessed.
During the period you make payments to the lienholder, you do not actually own the vehicle - even if you have the car title. You do, however, have the right to register the car in your name and legally drive it. The lienholder maintains complete legal control of the vehicle, which means you do not have the right to sell your car to another person. But, do not panic; it is not impossible to sell a vehicle with a lien on the title. There are a few ways to go about selling a car with a lien.
The Bottom Line
Whether buying a car with a lien or selling a car with a lien, always do extensive research beforehand. There are many instances where people buy and sell cars with a lien without any problems. Research the pricing, line up your vehicle financing, and always make sure agreements are in writing. Lastly, do not be afraid to reach out to your lienholder for advice on concluding the transaction the right way.
