How to Buy a Car With a Lien on It

by Scott Krohn

Buying a car with a lien against it can be done, but there are extra steps required to satisfy the lien holder, which can result in extra work to complete the transaction as well as the increased chance of potential problems. Before committing to a deal with a seller, consider the options for paying off the lien, as well as the risks entailed with each one.

The Lien

A lien is placed on the title of a vehicle to protect the interest of a creditor. A high percentage of liens are placed on vehicle titles by the lender that provided financing for the purchase. A lien holder will be listed on the physical title, if held by the owner and will also be recorded with the DMV in the state of the car’s registration. The transfer of title to a buyer cannot be completed until the lien has been satisfied and the lien holder provides documentation the lien has been released. Generally speaking, a lien will remain on the title when the car is being sold because the seller is not in the position to pay it off. This puts the responsibility of satisfying the lien on the vehicle buyer, which can be done in two ways.

Meeting the Seller at an Office of the Lender

This option brings the seller, buyer and lender together in the same place to take care of payments, paperwork and the transfer of the title. These types of meetings are possible if the lender is a larger institution with offices across the country or a smaller one with a local presence. The advantage of doing the transaction in a local office is that you, as the buyer, can make a payment directly to the lien holder from the funds being used to purchase the car, then pay the seller the remaining proceeds. With the lien satisfied, the lender can give you the title and the release of lien document necessary to transfer the title to your name. Because all three parties are present to work toward the completion of the deal, this is a lower-risk option for the buyer

The Risk of Dealing with a Lien Holder from a Distance

Closing a vehicle purchase with a lien holder that doesn’t have a local office adds some risk for the buyer, particularly if state laws require that the title and release of lien documentation be sent to the seller. In this situation, the buyer would send a check or wire funds to the lender to satisfy the lien, but would have to wait for the seller to deliver the paperwork to effect the title transfer. One way to mitigate this risk is to wait until the seller delivers the paperwork before making the payment on sales proceeds, but if the amount of the lien payoff is substantially more than what is owed to the seller, the risk shifts back to the buyer.

Hire an Escrow Service to Handle the Transaction

Buying a car from a private party presents a variety of risks, but the presence of a lien holder can add to the list of potential problems. If you are having doubts about covering the seller's debt by making a payment to a third party without collateral or are worried the seller may not deliver on specific obligations, hiring an escrow service may be the best solution. Usually, the escrow service sits in the middle of the three parties to make sure the loan is satisfied by the buyer, remaining proceeds are paid to the seller, and the title will be transferred by the lender. If you’re reluctant to add to the cost of your purchase by paying for this service, consider an escrow account as a solid form of insurance for a problem-free sale.

About the Author

After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.

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