(iSeeCars) — You may have come across the term “car lien” while shopping for a car or trying to secure an auto loan. So what is a car lien and what role does it play in the car buying process? We have the important answers.

What is a Car Lien?

A car lien is a contract that gives the lienholder the legal right to a vehicle until the borrower pays off the loan in full. All vehicles that are financed have liens on them. That means that if you take out a loan for a vehicle, your creditor is the legal owner of the vehicle and is entitled to repossess the car if you default on your loan payments. In other words, a car lien is an insurance policy for an auto loan lender so they aren’t responsible for payments if the borrower fails to pay for their vehicle. Liens can be placed on both new cars and used cars. 

Who Is the Lien Holder for a Car?

An auto loan lender is typically the lienholder on your car, and in most states is in possession of the vehicle’s title. The lender will usually file the lien with the state’s department of motor vehicles.

How Do I Obtain My Car Title After Paying Off My Loan?

When your auto loan is paid off in full, the lienholder is required to contact your state Department of Motor Vehicles (DMV) either electronically or by required paperwork. What happens next varies by state. Some states will automatically mail you your car title once your loan is paid in full. In other states, your financial institution will send you a lien release with documentation that the loan has been paid off. You will then have to visit the DMV to get your vehicle title and become the registered owner of the vehicle. 

You can learn more about your state’s process by visiting your state DMV’s website. 

Does Having a Lien on Your Car Affect Car Insurance?

Your car’s lien holder will likely require you to obtain certain auto insurance coverage in order to protect the creditor if the vehicle is in an accident, damaged, or stolen. Your lienholder may also appear on your vehicle’s insurance policy. After your loan is paid off, comprehensive coverage and collision coverage are likely optional and the lien holder can be removed from your policy.

Can I Buy a Car with a Lien?

If the car’s seller is unable to pay off their loan, they can sell the car while it still has a lien. If you’re considering purchasing a car with a lien through a private party, you’ll want to make sure that the lien is removed before you become the new owner. You can work directly with the lienholder to determine the payoff amount for the car, and you can either pay by cash or secure a loan through a lender. If you’re taking out a loan, your lender will complete the process of paying off the lien holder, and a loan for the vehicle will be placed in your name. 

How Do I Sell a Car with a Lien?

If you want to sell your car with a lien, you should first contact your lienholder for the loan payoff amount. Your lienholder can also guide you through the process of selling your car to a private seller.  When making a private sale, you’ll need to either pay off your loan prior to selling, or find a buyer who will pay off your car loan for you.

Because it might be difficult to find someone willing to pay off your loan, trading your car in at the dealership might be the easiest option. However, you won’t likely get as much money as you would get through a private sale. Dealers might pay off your loan as part of the vehicle trade-in process as well as handle the title transfer process. Beware that your trade-in amount might be less than what you owe if you’re upside down on your loan (i.e. owe more money on the loan than the car is worth). If this is the case, you will have to pay the difference between your trade-in value and the amount that you owe. 

What is an Electronic Lien?

The Electronic Lien and Title System is a paperless Title program that allows the Registry of Motor Vehicles and lienholders to electronically exchange title information.

What is a Mechanic’s Lien?

In some states, a mechanic can place a lien on your vehicle if you are unable to pay for maintenance or repair work within a certain amount of time. Depending on your state, an unpaid mechanic’s lien gives the lienholder the right to sell your car at auction. Paying for your repairs is the only way to keep you from losing your car if a mechanic’s lien has been placed.

How to Tell if a Car Has a Lien?

If you’re buying a used car from a private party, you should always check its lien status. Here’s how to find out:

  • Run a Comprehensive VIN Search: Services like the iSeeCars free VIN check let you enter your vehicle identification number or VIN. The VIN check will provide a comprehensive analysis of the vehicle including title/lien information when provided by the state’s DMV. 
  • Get a vehicle history report: A vehicle history report can provide a vehicle’s lien history. The iSeeCars VIN check also links to a CARFAX or Autocheck report, sometimes free of charge. 

Bottom Line

If a vehicle is financed, it will have a lien on it until it is paid off in full. If you’re the owner of a financed vehicle, it’s important to know who the lienholder is and what the insurance requirements are. If you’re selling the vehicle before it’s paid off, make sure you know which steps you need to take. Always make sure to check if a vehicle has a lien if you’re purchasing from a private seller. If the vehicle does have a lien, contact the lender to find out how to complete the car title transfer process.

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This article, What is a Car Lien?, originally appeared on iSeeCars.com.