Most car buyers finance their vehicle purchase. According to Statista, more than 80 percent of new cars and 40 percent of used cars are purchased with a loan. When purchasing a new or used car, the vehicle loan can be financed through the dealership (Buy Here, Pay Here), a bank, a credit union, or a private lender. Some buyers secure their financing through a bank or financial institution, while others rely on the dealership to help them find a lender.
When a car buyer secures a loan for their new or used car, a lien is placed on the car’s title. Here’s what car buyers and current car owners need to know about liens and the lender’s stake in the vehicle.
Why Does a Lender Hold Your Car Title?
A car loan backed by a financial institution or a dealership (Buy Here, Pay Here) will be disclosed on the car’s title; the lender will be noted as a lienholder on the car. What does this mean? A lien is a financial stake in the asset; when a customer finances a vehicle, a lien is placed on the car title. To have full ownership of the vehicle, the customer must pay off the loan in full.
A lien is placed on assets to ensure that the lender receives their payment for the loan. This ensures that full ownership of the vehicle’s title (a clean title) cannot be issued until those liens are paid in full.
Liens also are associated with home mortgages. When a lender finances a mortgage loan, a mortgage lien is listed on the home’s title. If the homeowner has a second mortgage or a HELOC, these lenders should be listed as well. When the homeowner sells their home, the balances for the loans associated with the liens are paid before the homeowner can receive any proceeds from the sale of their home.
When is a Lien Removed from a Car Title?
Car owners might wonder when the lien from their lender will be removed from their title. Once a car loan is paid in full, the lien can be removed. The car owner will receive legal paperwork from the lender stating that the lien has been removed; this is known as a ‘lien release.’
In some states, this paperwork doesn’t automatically remove the lien from the title, however. In certain states, car owners are responsible for re-titling their vehicles. To do this, the owner needs to bring their current title, the lien release paperwork, and any other applicable documentation to the DMV. The DMV also may charge a fee for issuing a ‘clean’ title.
Some car owners don’t pay for a new title when the lien is released. Instead, they keep the lien release paperwork with the title. However, since this paperwork can get lost, it might be easier for car owners to order a new title for the vehicle.
Are Liens Limited to Financial Institutions?
Liens are placed on property to secure a debt that is owed. Liens are not limited to financial institutions, though. If a property was used as collateral for a loan or service, a lien can be placed on the property.
Mechanics’ liens are an example of a lien that doesn’t require collateral-based debt. This type of lien can be issued by subcontractors and contractors, which allows them to place a lien on an individual’s property to help them collect the money that is owed to them. A mechanic can place a lien on a car if the owner hasn’t paid for the repairs. Electricians or other contractors might place a lien on a home related to improvements that have been left unpaid.
Some car owners use their cars as collateral for loans like a car title loan. These loans let the owner borrow the equity from their car to pay for necessary expenses, bills, or other needs. When a car owner agrees to a car title loan, the lender places a lien on the title. This shows that the lender is owed a debt related to the vehicle.
The Legalities of Liens
In most cases, a lien against a property must be paid in full before that property can be sold or change ownership. Lien holders have other rights, too. Since the lien holder has a stake in the property, they can repossess the property to sell it and pay off the debt that is owed to them.
Mortgage lenders can foreclose on a property and take possession of the home if the owner falls too far behind in their mortgage payments. Car loan lenders can repossess the vehicle if the owner fails to pay. Repossession and foreclosure processes are not simple and they don’t happen overnight; if car owners know that they are running into financial issues or are experiencing hardship, communication with lenders is crucial. In some cases, the lender could work with the car owner related to late car payments. Reach out to lenders if financial issues change; refinancing the loan also could be a possibility.
Can Car Buyers Avoid a Lien?
There is only one way for car buyers to avoid lenders placing a lien on their cars. A car loan could lead to a lien being placed on the title (on behalf of the lender). Buying the car outright without a loan means that the buyer has no debt against the vehicle.
As new and used car prices have become more expensive, purchasing a car with cash is difficult for many buyers but it’s not impossible. Buyers who are committed to purchasing their car without a loan need to save up for that purchase; this may require setting monthly savings goals to create a car fund.
When purchasing a car outright, buyers need to know exactly how much they can spend. The cash in the bank or the cash saved for the car is the budget. This can make it easier to choose a car, but it also could limit the choice.
While car prices have escalated, there could still be used vehicles for affordable prices in many areas. Low-priced cars might be older or have more mileage on the odometer. Buyers can inspect the car on the lot to understand any exterior and interior flaws. Ask to see a Carfax; this report shows the number of previous owners and other pertinent data related to the vehicle.
Take a test drive and listen for any strange noises; pay attention to the acceleration, braking, and overall handling of the vehicle on the road. Buyers also can request a third-party inspection to understand the vehicle’s condition better and to determine if there are underlying issues.
There are some vehicles that are renowned for their longevity. Buyers might focus on these durable vehicles; even older models might have many miles left in their lifespan. iSeeCars compiled a list of the cars that were most likely to hit 200K miles on the odometer. The five longest-lasting cars are:
- Ford F-350 Super Duty
- Toyota Land Cruiser
- Toyota Tundra
- Toyota Sequoia
- Ford F-250 Super Duty
Buyers might notice that the list is dominated by just two brands: Ford and Toyota. The Ford F-Series has been the best-selling vehicle for more than 40 years, and Toyota is known for its safety and reliability. All the longest-lasting vehicles are larger models—trucks and SUVs. Some buyers might not want to purchase a truck or large SUV as they are not the most fuel-efficient options.
However, for those who want to be able to keep their vehicle for many years and easily accrue six figures on the odometer, these five trucks and SUVs are the best choices. To find a model on the list that fits into the budget, buyers can use online sites to explore different prices in their area; just sort by price (lowest to highest) when searching for a specific model. Some sites also let buyers specify price parameters as well as the model they want.
Final Notes on Car Loans and Your Car Title
The majority of new car buyers finance their purchases through a lender. The car loan will lead to a lien placed on the title showing the lender’s financial interest in the vehicle. In most cases, car owners cannot sell their cars until the lender is fully paid.
Liens on assets are common. However, the idea of a lien might make some buyers anxious. The only way to avoid a lien on a car title is to pay for the vehicle upfront without a loan. This may require buyers to save for that purchase to accrue the money needed for their vehicle. Not all buyers can save thousands for a new car, but buyers who are diligent about amassing a car fund might find that buying a car in cash is simple and perhaps even a bit more empowering.