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What is a Lien?
Thinking about applying for a mortgage loan, financing a car, or getting emergency cash through a vehicle-secured loan? If you are fully approved for any of the aforementioned loans, a lien is placed on the title to your asset or property after the loan is complete. If you’re a first-time borrower, understand that a lien is a creditor’s legal claim or right against the asset or property used as collateral to back the loan. A lienholder is essentially a company, such as a bank, online lender, or financial institution, that holds a claim to your asset until you’ve completely paid off your loan.
The primary purpose of a lien is to provide the lienholder with a security interest when lending money to an individual. If a borrower fails to meet their payment obligations, the lienholder can seize and sell the collateral to recover the remaining balance of the loan. While liens are usually voluntary, meaning you agree to let a lender have a claim on your asset, some liens can be involuntary due to unpaid debts or legal judgments against the property. Common examples of an involuntary lien include a mechanic’s lien or a tax lien.
What is a Lienholder on a Car?
A lienholder on a car is a lender, often a bank or financial institution, that provides you with a loan to finance the purchase of a vehicle. The lienholder will have a legal right to your car throughout the repayment process and will not remove the lien until you’ve completed your payment obligations. If you miss payments and default on your loan, the creditor can repossess your vehicle and sell it at auction to pay off the amount you owe. Additionally, your credit score may be negatively impacted if your lender reports the repossession and negative payment behavior to a major credit bureau.
As long as you’re responsibly making your monthly payments, the vehicle will remain in your possession. If you’re struggling to make a loan payment, you should contact your lender immediately to discuss your options. You may be able to explore alternatives to car loan default, such as finding more affordable payment plans, adjusting your due date, or obtaining a loan extension.
Just like financing the purchase of a vehicle, a lien will be added to your car’s title by the lender if you take out a vehicle title loan. The main difference between the loan options is that through a title loan, you’re borrowing against your vehicle’s value by pledging your car’s title as collateral for the loan. Instead of using your money on a down payment to purchase a car, you can use your title loan proceeds to handle any unexpected or personal expenses. Depending on your vehicle’s equity and your income, you can borrow up to half or more of your car’s overall value.1
Whether you apply for a car loan or a car title loan, you must submit some documents to receive approval, which often include proof of income and residence, along with a valid, government-issued photo ID card. Dial 855-422-7412 to learn more about the requirements you must meet to get a loan against your car.
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How Does Having a Lienholder Affect Vehicle Ownership?
Having a lienholder added to your vehicle title can affect your car’s ownership in various ways. Even if you are the vehicle’s rightful owner, a lienholder has a legal claim to your car, which limits some of your actions until the lien is released from the title. If you want to sell your vehicle, for example, you cannot complete a sale without finishing your payment obligations first.
Some dealerships are willing to accept trade-ins of vehicles with liens, and the dealership will typically pay off the outstanding loan balance to the lienholder. If it is a private sale, the buyer must be willing to pay the money upfront to the seller, so they can satisfy the remainder of the debt before the title can be transferred to the new owner after the lien is released.
As mentioned previously, a lender or financial institution can repossess your vehicle if you fail to keep your loan in good standing. The best method to avoid loan repossession is to prioritize your loan payments and create an effective budgeting plan. If you’re a responsible borrower and are consistent with your monthly installment payments, a lien on your car’s title won’t disrupt your daily driving routine. Whether you have an auto title loan or a financed car, you can continue driving your vehicle as you normally would if you diligently pay your loan on the due date each month.
Don’t forget to talk to your lender or loan servicer if you have problems making a loan payment. You may be able to access options to help you stay on track with your payment schedule and reach the final payment to own your car outright!
Can a Lienholder Impact Your Auto Insurance?
When a lienholder is listed on your vehicle’s title, it will typically impact your auto insurance. Most notably, it impacts the type of coverage you are required to purchase to get approved for the loan. In most states, drivers are legally required to carry liability insurance coverage on their vehicles to cover damages caused to others in the event of an accident. The minimum required insurance coverage in many states does not protect the driver at fault, but it covers bodily injury and property damage to the other individuals involved in the accident.
When using your vehicle as collateral for a loan, a lienholder may require you to have more extensive insurance coverage, including comprehensive and collision coverage. Lienholders typically have auto insurance requirements to ensure their asset is protected from damages caused by accidents or other unexpected situations.
If you have to purchase additional insurance coverage to qualify for a loan, you can expect your insurance premiums to be higher than they would be if you didn’t have a lienholder added to your car’s title. The lienholder may be listed on your car’s title and your car insurance policy until the loan is completely paid off.
If you’re involved in an accident and file an insurance claim, the payout is often directed to the lienholder before the remaining balance is paid to you. In some cases, you may be recommended to purchase Guaranteed Asset Protection (GAP) insurance coverage, which exists to cover the difference between your vehicle’s depreciated value and the remaining loan balance if the car is totaled.
While having a lienholder can increase your car insurance premiums, you can rest easy knowing your car has better protection on the road. Depending on the insurance company you choose and other factors, like your driving history and marital status, you can benefit from some discounts that can help you save money on car insurance!
How Does a Lienholder Work with an Auto Title Loan?
As mentioned above, the process to have a lien added to your car’s title after your car title loan is complete is similar to when you finance a vehicle. If you’re approved for emergency cash through a title loan and sign your loan contract, a title lender will place a lien on your car’s title and have a legal claim on the collateral throughout the repayment period. After you make your final loan payment, the lender will remove the lien, making your title free and clear again! If you consistently keep up with your loan payments, you can continue driving your car wherever you need to go during the repayment process.1
Talk to a title loan representative today at 855-422-7412 or check out LoanMart’s FAQ page for general questions that may help you better understand vehicle-secured loans.
