Financing a car can require you to understand a whole new set of vocabulary words, so reviewing what those new terms mean is critical. A key term you’ll need to know is “lienholder,” which means an individual or institution with a legal right to a property until the debt is paid off.
This means that when you borrow money to purchase a car, the lender is typically the lienholder. The lienholder status gives them security and part ownership until you’ve fulfilled your repayment obligations. A lienholder can impact ownership rights, credit scores, and your overall financial landscape, so it’s vital to understand their role. In this article, we’ll dive into what a car lien is and how lienholders can influence your auto insurance coverage.
What is a car lien?
A car lien is the legal right a lender has to a car until you’ve paid off the outstanding loan borrowed for the car. A lien is a way for the lender to guarantee you’ll repay them, as they can repossess the car if you miss or violate your payment terms. If your vehicle has a lienholder, you must pay the loan in full before you can sell the vehicle.
Whether buying or selling a car, understanding what to do when a vehicle has a lien is imperative. Buyers should ask about any liens on the car before purchasing it because that can affect ownership and the right to sell. A seller should take care of any outstanding liens to transfer a clear title to the new owner.
What is the lien release process?
The lien release process is crucial for removing a lender’s legal claim to your car once your debt has been paid off. Here's an overview of how the process typically works:
Step 1 – Pay Off the Loan: Once you’ve made your final payment on the car loan, the lender/lienholder must release their claim on the vehicle, transferring full ownership to you.
Step 2 – Receive the Lien Release Document: After the loan is repaid, the lender will send you an official lien release document to confirm that the loan terms are satisfied and that they have no further claim on the car.
Step 3 – Check Your State’s Requirements: The process for obtaining a new title can vary depending on whether you live in a holding state or a non-holding state:
Holding States: The lender retains the title until the loan is fully paid. Once you receive the lien release, you must take it to your state’s Department of Motor Vehicles (DMV) along with any required paperwork to obtain a new title in your name.
Non-Holding States: You may have received a copy of the title when you purchased the car, with the lender listed as a lienholder. After paying off the loan, you must submit the lien release to the DMV to update the title.
Step 4 – Submit Documentation to the DMV: Visit your local DMV with the lien release letter and any other required documents (like the original title, if applicable). Depending on your state, this may involve filling out forms and paying a small fee.
Step 5 – Receive Your New Title: After processing your request, the DMV will issue a new title, usually by mail, reflecting you as the sole owner of the vehicle. This process can take two to six weeks, depending on state regulations and the lender’s processing time.
Step 6 – Notify Your Insurance Company: Once you have the new title, let your auto insurance provider know to remove the lienholder from your policy. Full ownership may also allow you to adjust your coverage options, potentially lowering your premium.
How can lienholders impact auto insurance?
Your car’s lienholder has a significant financial interest in your vehicle, so they can have an impact on your auto insurance, from the amount and type of coverage you must have to who gets payouts in the event of a claim.
Insurance Requirements: When financing a vehicle, your lienholder typically wants you to have full coverage insurance. Full coverage usually refers to the state-mandated minimum liability coverage and collision and comprehensive coverage. This requirement protects the lienholder's investment in the vehicle, ensuring it is covered in case of damage or theft.
Listing the Lienholder: The lienholder must be listed on your auto insurance policy as they have an insurable interest in the vehicle. Any claims made on the policy must include the lienholder so they can be compensated for their financial stake in the car if it is damaged or totaled.
Impact on Claims: In case of an accident or damage, the lienholder will be involved in the claims process, and any payouts for repairs or total loss must be coordinated with them, which can complicate the claims process.
Changes After Loan Payoff: Once the loan is paid off and the lien is released, you can remove the lienholder from your policy. You can adjust your coverage levels at this point, potentially lowering your premiums if you drop comprehensive and collision coverage.
Find the Auto Insurance Coverage You Need with SelectQuote
Whether you currently have a car with a lien or you’re considering financing a vehicle, it’s important to review how a lienholder can impact your auto insurance. Luckily, with more than 40 years of industry experience, SelectQuote can help. Our licensed insurance agents search quotes from several of the nation’s most highly trusted carriers in just minutes so you can get the right policy to fit your budget and needs.
