What is a lienholder?

Weekend Images Inc./Getty Images


More than 85% of new vehicles purchased in the United States are financed. Auto loans are popular because many people don’t have the funds to pay the full price of a vehicle upfront. And even if they did, many car companies offer low interest rates as an incentive to finance a car. This means the majority of consumers who are currently paying off a car loan have a lienholder attached to their loan. It’s important to understand what a lienholder is since they also have an interest in your vehicle.

What is a lienholder?

A lienholder is the term for the lender who finances your vehicle. It can be the car dealer, a bank or a private party. The entity holds a legal claim (or lien) on your vehicle until you pay off the loan made to you.

The lienholder will be listed on the vehicle’s title until the loan is paid in full. Once the loan is paid, the title will be released to you as the sole interest. In most cases, a lienholder will also require you to have full coverage on the vehicle and list them on the insurance policy. If you fail to make your car payments or don’t comply with the lienholder’s insurance requirements, the lienholder could repossess the vehicle.

Who needs a lienholder?

The most common type of lienholder is the loan issuer of your car loan. But there are other rare occasions when a lienholder may be added. A person may file a mechanic’s lien on your vehicle if you don’t repay a debt. The mechanic’s lien may need to go through the courts first before a lien can be added at the DMV.

If you plan on lending someone money, you could ask to be added as a lienholder on their vehicle as collateral for the loan. If the person fails to pay you back, you could recover the loan amount as the first secured party on the car title. If the vehicle is sold, the outstanding amount of the loan owed to you must be paid before your interest in the car is released.

Do I need a lienholder if I lease a car?

A lienholder is only needed when financing a vehicle. A lease is not a loan because you don’t own the car — you’re essentially renting it for a set period of time. There is a financial transaction going on between you and the company that leases you the car. But instead of being called a lienholder, the dealership will be referred to as a lessor.

How to find out if a car has a lien

If you’re interested in purchasing a pre-owned vehicle, it’s a good idea to check and see if the car has a lien. An individual may have placed a mechanic’s lien on the vehicle or the car payments were not paid in full, resulting in a possible repossession if the car is located. Purchasing a vehicle with a lien means you’re ultimately responsible for outstanding debts to the lienholder. Here are some ways to find out if a car has a lien before you buy it:

  • The fastest way to check if a car has a lien is by reviewing the vehicle’s documentation. Check the vehicle’s title to see if a lienholder is named on the title. You could also look at the insurance declaration page to see if anyone else was named as an additional insured.
  • If you don’t have access to the title, many states have an online title checker. You’ll need to enter the vehicle identification number (VIN) to receive a title report on the car.
  • You can pay for a title report from companies that provide car histories and perform VIN checks. The companies provide a title check as well as an accident history for the associated vehicle.

How do I buy a car with a lien?

If you know that the car you’re interested in buying has a lien and you’d like to move forward with the purchase, there are some steps you could take to protect yourself before you buy the car:

  1. Negotiate a lower price for the vehicle. You may be able to deduct the outstanding loan from the vehicle purchase price and use the deduction to pay the loan off.
  2. Ask the seller to get the vehicle loan discharged. For your protection, wait for the seller to complete the process before you purchase the vehicle.
  3. Convince the seller to pay off the loan amount. The seller may be willing to pay the loan off with the proceeds from the sale. Be sure to get the agreement in writing.
  4. Ask the seller to refinance the amount owed. If the seller can refinance the amount to pay off the lien on the vehicle, it clears any financial responsibility from you when you purchase the car.

Does a lien affect car insurance?

A lien affects your car insurance because the lienholder that’s financing the car loan will likely require you to buy more insurance than the state-required minimum liability coverage. Liability coverage only protects other vehicles damaged in an accident. The lienholder will require full coverage to include protection for the financed vehicle, which is more expensive than basic liability insurance.

Frequently asked questions

What’s a lienholder on a car?

The lienholder on a car is the person or company that provided you with the loan to purchase the vehicle. They are listed on the vehicle title.

What can a lienholder do?

A lienholder can take back the vehicle if you fail to make your payments on the car or truck. In addition, the lienholder can require you to expand your coverage by purchasing full insurance to protect the vehicle, as well as require you to add them as an additional insured on the policy.

What is the best car insurance company?

If you’re planning on financing a vehicle, the lienholder will require you to buy full coverage auto insurance. Shop around to get quotes from the best car insurance companies to ensure you’re getting the right amount of coverage at the best price.

Written by
Cynthia Paez Bowman
Personal Finance Contributor
Cynthia Paez Bowman is a finance, real estate and international business journalist. Besides Bankrate.com, her work has been featured in Business Jet Traveler, MSN, CheatSheet.com, Freshome.com and SimpleDollar.com. She owns and operates a small digital marketing and public relations firm that works with select startups and women-owned businesses to provide growth and visibility. Cynthia splits her time between Los Angeles, CA and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development.