What is a Lien Title & Is It a Bad Thing to Have One?

Though it sounds like a bad thing, a lien title isn’t always as scary as it might appear. From what is a lien title to should I buy a car with a lien on it, here’s everything consumers need to know about the lien process.

What is a Lien Title?

First, what is a lien title? A lien title refers to the fact that another entity (not necessarily the “owner”) has rights to a piece of property. In this case, the property is a vehicle, and the lien title likely means the registered owner still owes money on a loan.

There are other reasons, apart from a vehicle loan, that a car can have a lien on it. For example, if the owner of the car owes the government money, such as back taxes, the vehicle might have a lien on it until the person responsible pays back what they owe.

Car manufacturers often hold liens over vehicles because dealerships can offer car buyers a loan. For as long as the car or truck retains financing—until you pay off the loan—the manufacturer or loan company holds the lien.

Is a Lien Title Bad?

On its own, a lien title isn’t necessarily a bad thing. If you have a vehicle you bought with financing, or you’re leasing a vehicle, then there is a lien on the title. The title itself will show the lienholder, whether a bank, vehicle manufacturer, or a related body, as well as the registered owner.

To obtain and keep car insurance on a vehicle with a lien title, you must disclose the lienholder to the company. Once you pay off the loan, the lien goes away, and you alone are the registered owner and sole responsible party.

A lien title can be a bad thing, however. If a person owes the government money, a lien against a vehicle means the “owner” doesn’t really own the car, to begin with. Instead, the government owns the property and will receive any funds from the sale to cover the amount on the lien.

Another scenario in which a lien is a decidedly negative entity is when a mechanic files one against a vehicle owner. If a mechanic performs work on a car but does not receive payment, they can place a lien through court judgment for the value of the work. It doesn’t always end in the mechanic’s favor but pursuing a court case can help them recoup the cost of their labor and parts.

The primary problem with liens is that vehicles can begin to depreciate as soon as they leave the sales lot. Therefore, used truck values might not be so great—and even a brand-new truck with financing doesn’t always retain the value which matches the loan balance.

How Does a Lien Work?

While a lien isn’t always a negative thing, it’s important to understand how the lien process works.

When someone buys a vehicle with financing, they become the “debtor,” meaning they owe a debt to the entity which offered the funds. If you pay off the loan on the vehicle, the lien is removed, and you own the property free and clear.

If someone stops making payments on the loan, then the lienholder can repossess the vehicle and sell it to recoup their investment. When the vehicle is sold to another party, the original lien clears. Alternatively, the debtor might sell the vehicle with a lien on it, in which case the bank must agree to the terms or the debtor must pay them off first. To transfer a vehicle via a sale, you must possess the title—which the bank keeps until they receive full payment.

Can You Sell a Car with a Lien?

The short answer is yes, you can sell a car with a lien on it. However, it can be more complicated than selling a car you own outright.

Selling to a dealership is often the simplest way to perform this type of transaction, but it can be challenging to negotiate for a price that feels fair to you. If you decide to sell to a dealership, make sure you know the vehicle’s value and arrive at the appointment prepared. With a dealership sale, you can pay off the lien immediately and transfer the title to the dealership, which can then sell the vehicle and make a profit.

Another option is to sell your vehicle to an individual buyer, which often nets a higher sales price. The paperwork is more complicated, though, and the buyer and seller might need to attend an appointment together to complete the transaction and obtain the title.

Using an escrow account is a helpful practice when selling a car to an individual. An escrow service can secure the funds and perform the transfer so that both the buyer and seller receive what they sign up for. You can also combine escrow and lien payoff services to make the whole transaction even simpler, though you may pay more for the process than if you were to do it privately.

Should You Buy a Car with a Lien?

Buying a car with a lien is one way to purchase the vehicle you want at a reasonable price. However, you should do thorough research and make sure your assets have proper protection (via an escrow service or other option) throughout the transaction.

Obtaining a vehicle history report can help give you peace of mind and confirm the vehicle’s condition and value. Because new car prices are often not feasible for consumers looking for a good deal, purchasing a used vehicle with a lien can be a decent option.

At the same time, many vehicles, such as a Toyota SUV, retain their value longer than average. This means a vehicle with a lien might be a good deal after all. Check on new Toyota prices before agreeing to buy a car with a lien to make sure it’s a smart buy. 

Honesty is crucial throughout the process, so make sure the seller is up-front about the conditions of the lien. If possible, secure commercial financing for the deal—or purchase via the existing lien holder or financial institution—to avoid scams.

If you pay the seller for the vehicle before signing a contract or agreeing to legal terms, you might wind up paying the lease off for them and receiving nothing in return.