If you’re shopping for a used car and are considering buying from a private seller instead of a dealership, do your homework and find out if the car still has a lien on it from a lender. Buying a car with a lien is not impossible, but it can be more complicated as you will need to take steps to ensure the lien is removed before the title is transferred to you.
What is a car lien
A car lien is a contract that serves as security for a lender if a borrower fails to keep up with car loan payments. If an auto loan goes into default, the lender – also known as the lien holder – can use the lien as a basis to repossess the vehicle. Once a car loan is fully paid off, the lien holder is released from the loan and the car is now fully owned by the borrower. Therefore, an auto loan is considered a secured loan.
How a lien affects your car purchase
When considering buying a car with a lien, you need to ensure that the lien is removed by the time the car is in your hands.
If you buy with cash
Start by speaking to the current lien holder to determine the total amount owed to release the car, as well as any other stipulations that may affect the sale. If you are paying cash, you may be able to work directly with the lien holder to pay off the remaining balance yourself.
If you buy with a loan
Getting a personal loan to pay for the car can also work. You can share the details of the purchase with your lender so they can facilitate repayment for the lien holder, with the remainder – if any – going to the seller. Once the lien is paid in full, you or your lender will need to receive the title and you can register the car in your name.
If the seller repays the loan before the purchase
The sale may go more smoothly if the seller of the vehicle simply pays off their car loan and obtains the title before the sale. However, this option is not possible for some people with an auto loan, and especially for those who owe tens of thousands of dollars on a newer car or those who owe more than the value of the car.
If, for example, the seller owes $20,000 on a car that privately sells for $17,000, he would still have to pay the lender $20,000, which is $3,000 more than he receives from the sale. In such cases, the seller may choose to refinance the remainder of the auto loan into an unsecured loan, such as a personal loan, in order to cancel the auto loan.
Formalize the purchase
However you handle this situation, be sure to write a contract that outlines how the lien will be removed or transferred. Although not required in all states, it is advisable to create a bill of sale describing the transaction. Make sure it’s dated and signed by both parties, so everyone has a record of the sale.
Also keep in mind that you may be able to use a third-party depository service to handle the financial side of this transaction. An escrow service will help ensure that the money from the sale is transferred securely. Just be aware that escrow companies charge fees for their services.
The bottom line
There are many instances where people buy a used car with a lien from a private party without encountering any challenges or problems. To make sure the process goes smoothly and avoid any major issues, do your homework and know what steps need to be taken to remove the privilege. You should also research prices, line up your own auto financing, and get any deals you make in writing.