While some car buyers can afford to pay for a new car in full, many drivers have to finance their vehicle with a car loan. If you take out a loan, your car’s loan will have a lienholder. A lienholder is the bank or dealership that owns your loan (it can also be an individual person).
Until you finish paying off the loan, your lienholder has a legal right to repossess your car if you stop making payments. Lienholders also usually require you to get certain types of car insurance in order to protect their investment (your car).
In some cases, insurance claims on your car may be paid out to your lienholder, or they’ll have to sign off on how you use the claims settlement.
What is a lienholder on a car?
When you take out a loan on a car, your loan will be held by a lienholder. Leinholders, sometimes called lienors, have a legal claim to your car. Basically, this means that your lienholder can repossess your car if you stop making payments.
It also means that your lienholder has an insurable interest in your car and must be listed on your policy as a loss payee, meaning they can receive payments after you make a claim.
Sometimes this means that the money from a car insurance claim will go to your lienholder instead of to you, or that your lienholder has to sign off on your claims payment to make sure you’re using it on repairs for your car.
Your lienholder can also require you to get full-coverage car insurance, which just means a policy that includes comprehensive and collision coverage.
Who can be a lienholder on your car?
In most cases your lienholder is the group that gave you a loan when you bought your car. That means that the bank, car dealership, credit union, or even individual who loaned you the money is probably also your lienholder.
It’s also possible that your lienholder and lender are different. Your lender can sell your loan to another group. If this happens, your lienholder will change, and you’ll start making payments to somewhere other than the institution that originally gave you the loan.
You will be able to remove your lienholder from your car insurance policy when you pay off the loan. You can also drop full coverage once your lienholder is out of the equation, but it’s usually a good idea to keep as much protection as possible.
Does the lienholder appear on the car’s title?
Yes, the lienholder appears on your car’s title because the lienholder is the car’s legal owner for as long as you have an outstanding loan. Your lienholder may hold your car’s title (or a copy of the title) until you finish paying off the loan.
Since your lienholder appears on your car’s title as the owner, they can repossess your vehicle if you don’t make payments on your loan.
When you pay off your loan (and any interest that has accumulated) your lienholder will sign your car’s title over to you. At this point, you will become the car’s legal owner.
Can lienholders have insurance requirements?
Yes, lienholders usually require borrowers to get a full-coverage insurance policy to protect the value of your car. A full-coverage policy is just one that includes coverage for damage to the car itself.
If your financed car were completely totaled and you didn’t have enough insurance to replace it, there’d be no backing for the lender’s loan.
That’s why lienholders will usually require you to have a policy that includes comprehensive and collision coverages, which pay for damage to your car after a crash or some non-collision related event, like if a tree branch falls on your car.
Do lienholders require you to get gap coverage?
Your car loan’s lienholder might also require you to add gap coverage to your policy when you finance a car.
After your car is totaled, gap coverage makes up the difference between your vehicle’s depreciated value and your loan’s balance, so you’re not left making payments on a car that doesn’t exist anymore.
It’s a good idea to get gap insurance even if your lienholder doesn’t require it. If you’re financing your car and you don’t have gap coverage, you’d be responsible for paying the difference between your totaled car’s value and your loan yourself.
How do you file a claim with a lienholder?
When you file a claim on a covered loss and get a check from your insurance company, it may be made out to both you and your lienholder. This is so your lienholder can ensure that the check is spent on repairs.
Since your lienholder may want to have some say over how you spend your check before they’ll endorse it, you should save everything related to your car’s repairs after a claim. This way, you stay in compliance with your lender’s terms.
How to add a lienholder to your car insurance
When you get an auto loan, you’ll have to contact your car insurance company and add a lienholder to your policy along with the new car. To add a lienholder to your auto insurance coverage, you must:
Give your lienholder’s contact information to your insurance company.
Adjust your policy’s limits of liability and coverage to make sure you meet your lender’s insurance requirements.
Ask your insurance provider to let the lienholder know that you’ve bought enough insurance coverage to meet their requirements.
When you finish paying off your car’s loan, you can remove the lienholder from your policy’s declarations page after providing your insurance company with proof of the repayment of your loan.
How to buy or sell a car with a lien
Whether you’re thinking of buying a car with an existing lien or selling your own vehicle that still has an outstanding loan, there are a few things that you should be aware of.
Buying a car with a lien
If you’re interested in a car that has a lien against it, you should make sure the lien is settled before you go through with the sale. Otherwise you’ll be stuck paying off the loan (and its interest) yourself.
If the seller doesn’t have enough money to settle the lien outright, they may have to take out a separate personal loan to pay off their lienholder. You should not pay money to the seller directly to settle their loan. Instead, you should finalize your purchase in person at the lienholder’s office in order to protect yourself.
Selling a car with a lien
The steps for selling a car with a lien against it are just the reverse of buying a financed vehicle. You’ll have to settle your loan’s outstanding balance with your lienholder before you can transfer the title to a new owner.
This could mean getting financing to pay off the rest of your loan, arranging a meeting at your lienholder’s office for the sale of your car and repayment of the loan, or updating your car’s title after you’ve paid off your loan to remove the lienholder.
What is the difference between a lienholder and lessor?
While a lienholder is the owner of the loan that you took out to finance your car, you have a lessor when you lease your car. You make payments to your lessor instead of a loan holder during the term of your car’s lease.
When you have a car loan, you make payments towards the goal of eventually paying off the full balance and owning the car outright. With a car lease, you’re paying the lessor an agreed-upon monthly amount for as long as you want to use the car, kind of like a long-term rental.
Leases usually last a few years, at which point most people give the car back to the lessor and start a new lease for a new car. You can also sometimes buy your leased car from your lessor, but this can be tricky.
Unlike lienholders, lessors often do require you to get gap coverage to protect the value of your leased vehicle.