If you financed your car, you might not actually own it. The lender, also known as the lienholder, is typically listed on your car title and insurance policy; that means the lienholder technically owns the car and holds the title until the car loan is paid off.
“The lien is the attachment that the lender has to your vehicle,” says Laura Adams, an insurance expert and host of the “Money Girl” podcast. “So when you get an auto loan, you put the car up for collateral, which means that if you don’t pay the auto loan then the lender can take the car from you.”
This applies to the vast majority of U.S. drivers. The average price of a new car was almost $40,000 as of August 2020, up 4% from the previous year, and that’s why roughly 85% of new cars on the road are financed with a loan or lease, according to Experian data.
Here’s what you need to know about having a lien on your car, how it affects your car insurance coverage, and how to check a car’s lien status.
Who Is the Lienholder on My Car?
If you purchase a car without a loan, you won’t have a lienholder listed on your car title or insurance policy. But most people finance their cars, which means the majority of cars have liens on them.
“Your lienholder is whoever is financing the vehicle. That’s the most simple and common way to think about it,” says Kyle Schmitt, vice president and managing director of insurance intelligence at J.D. Power.
A car lien provides the lender with a guarantee that it will receive repayment for your loan. The lienholder, which can be a bank, financial institution, or private party, has a vested interest in your car until you pay it off in full because they lent you money to purchase it.
For example, if you stopped making your monthly payments on your car, your lender could legally repossess the car from you without notice.
How Does a Lien Affect My Car Title And Insurance Coverage?
Having a lien on your car affects the auto insurance coverage you’re required to carry.
The lienholder, aka your lender, wants to protect their investment in the event the car is damaged or destroyed, so you’ll typically be required to purchase comprehensive and/or collision coverage on your car insurance policy, says Adams.
“The lienholder typically dictates what insurance you must have. They want to make sure that the car can be repaired if you have an accident and that it will be in good shape if they have to take the car back from you for any reason,” says Adams.
If you ever hit another car or object, that’s where your collision coverage will step in to help pay the repairs. Comprehensive coverage is the opposite; it covers repairs to your car if it’s damaged in an event out of your control, such as theft, falling objects, or natural disasters.
Once you’ve paid off your loan, collision coverage and comprehensive coverage become optional on your car insurance policy — but it’s still a good idea to keep those types of coverage, according to car insurance experts.
When financing a car, many lenders possess the title — which is a certificate that details who legally owns the car — during the entire length of the car loan. You’ll typically see the lienholder’s name on the car title.
It doesn’t matter if you have the physical title, though, as you are still allowed to drive the vehicle. Once the car loan is paid off, the lender will take its name off the title by either signing it over you or submitting paperwork to your state’s Department of Motor Vehicles (DMV).
You can then do whatever you want with the car; it’s yours to keep, sell, or insure differently.
Note that if you have a lien, you’ll likely need to pay off the car before you can sell it. How you do that depends on how you plan to sell it. For example, if you’re planning to sell or trade in your car at a dealership, they might pay off your loan as part of the deal and would likely handle the title transfer. That process gets a little more complicated if you’re trying to sell your to a private party.
3 Ways to Find Out if a Car Has a Lien on It
If you ever want to check a car’s lien status, there are a few ways you can go about it.
Check The Car’s Paperwork
If you have access to your car title and registration, it should be a reliable source to see if there’s a lienholder listed. “You want to see the title of the vehicle,” says Adams. Keep in mind the details listed on a car title vary by state; however, it should have your name, the lender’s information, the Vehicle Identification Number (VIN), and the seller’s information.
Go to Your State DMV Website
Browse your state’s DMV website to see if there’s an option to complete an online lien search using the car’s VIN. It’s a 17- digit number that’s easy to locate on the car’s registration card or on the vehicle itself. Depending on the state, you might only be able to put a request in person or through the mail, and you may have to pay a small fee to receive it.
Pull a Vehicle History Report
You can get a car’s lien history by requesting a vehicle history report through a provider, such as the National Motor Vehicle Title Information System Autocheck, or Carfax. A vehicle history report can also tell you about the car’s odometer readings, any previous owners, or damage — all important to know if you’re planning on buying the car.