What is a lienholder?

Let’s break down what a lienholder is and what it means for your car insurance.

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Whether you’re buying used or new, purchasing a new car is a big deal. While some car-buyers can afford to pay for their car in full when they first get it, many drivers choose to finance their vehicle, which means taking out an auto loan to buy the car, and then paying off the loan over time (plus interest).

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A lienholder is simply the party that owns your loan. Usually, that’s whatever institution gave you the the auto loan in the first place, whether it’s a bank or a car dealership. In some cases, your loan may be sold to another party, in which case your lienholder switches. Until you pay off the loan, the lienholder has a stake in your car, and they have the legal right to take possession of your vehicle if you stop paying back your loan.

Your lienholder has other rights too, and may require you to have certain types of car insurance coverage. And your lienholder will likely be listed on your car insurance policy and your car’s title until your loan is fully paid off.

Read on: Here's what a lienholder means for your car insurance.

What is a car loan?

If you can’t afford to buy a car by paying in full, you have the option of taking out an auto loan. An institution, usually a bank or an auto dealer, lends you the money to purchase the vehicle, and you agree to pay back that amount over time, plus interest. It’s a good idea to shop around for a loan, just like you would for car insurance, to make sure you’re getting a good deal.

Typically, you’ll pay back an auto loan in monthly payments. If you don’t keep up with your payments, your lienholder has the right to take possession of your car. Always read the fine print of an auto loan before signing so you know what else you’re agreeing to do.

Your lienholder can change if the institution that originally issued you your loan sells it to someone else. Usually, your lienholder is listed on your car’s title certificate, which is a legal document, issued by your state’s department of motor vehicles, that says who owns a car.

Because you and your lienholder both have a stake in your car, you’ll often both be listed on the title. But if you’re not sure who your lienholder is and its not on your car’s title, you can find out by contacting your DMV and giving them the car’s vehicle identification number (VIN), make and model.

If you lease a car, do you have a lienholder?

Leasing a car is an alternative to buying. With a lease, you pay monthly payments for the right to drive a car, but, unlike a loan, you aren’t paying towards ownership. And the dealership or company that owns the car isn’t a lienholder, they’re your lessor.

A lessor may also have requirements for the car insurance you purchase for a leased car, like a lienholder, but the relationship is different. Instead of sharing ownership, a lessor completely owns a vehicle and by leasing it you’ve agreed to a sort of long-term rental, at the end of which you’ll either give the car back, take the option to purchase it for yourself, or receive a lease for a new car.

Learn more about leasing a car vs buying one.

What insurance does my lienholder require?

No matter where you live in the U.S., you’re likely required to have at least some amount of car insurance. Most states require drivers to at least carry liability insurance, which covers you if you cause property damage or injuries with your vehicle. But if you bought your car with a loan, your lienholder may require you to have more than your state’s minimum amount of required car insurance.

Comprehensive and collision coverage

Many lienholders require drivers to add comprehensive and collision coverage to their car insurance policies. Comprehensive, or comp coverage, covers damage that can happen to your car when its not being driven, like damage from fire, extreme weather, theft, falling objects, and vandalism. Collision insurance covers damage to your car from an accident, regardless of who was at fault.

Together, comp and collision give your vehicle protection from lots of types of damage. And it makes sense that your lienholder wants your car protected — they have a stake in your vehicle for as long as you’re still paying off your loan, and they want to protect their investment as much as possible.

Gap coverage

If you’ve financed a new car with a loan, you may want to look into gap coverage, even though your lienholder may not specifically require it. If your car is completely totaled in a covered loss, your car insurance coverage will pay you the actual cash value (AVC) of your car, which may be less than you paid for it, since it accounts for depreciation.

That could leave you owing more money to your lienholder than you got for your totaled car, and you’d be stuck paying the difference out of your own pocket. But gap coverage covers that difference between the ACV and what you still owe to your lienholder, which is why it’s a smart buy for drivers who’ve just purchased a new car with a loan.

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Filing a claim when you have a lienholder

Since your lienholder is listed on your insurance policy, 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.

Depending on your lienholder, they may want to have some say over how you spend that check before they’ll endorse it. They may require documentation, like receipts or photos, proving that you used the check on the needed repairs — another way of protecting their investment. Err on the side of saving everything related to your car repairs. Between your car insurance company and your lienholder, every document could come in handy.