Are you about to purchase a car but the owner told you that it has a lien? It’s a right that the government gives to a creditor to assume ownership of a debtor’s collateral asset. In short, the government gives your bank or credit lender permission to repossess your car when you default.
A lien enables your car dealership to retain your car title until you clear the auto loan. If you’re a first-time car owner who wants to know what is a lien on a car, here are answers to some important questions.
1. What happens if you buy a car that has a lien on it?
The law allows you to buy cars with liens. If you’re planning to buy a car, make sure you visit the seller’s creditor to get approval. Doing this prevents disputes from arising when taking ownership of the car.
Should you buy a car with a lease on it? It’s not advisable because the seller has an outstanding balance with his or her bank. That means you won’t receive the car title as soon as you’d want to. The seller also won’t allow you to do much bargaining because they need every coin to get out of their outstanding auto loan.
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2. Can you sell a car with a lien?
In order to sell, you need your bank or car dealership’s approval. The main reason being security. Identity thieves who’ve obtained auto loans fraudulently violate the law by selling cars with liens to unsuspecting buyers.
What happens when you sell a car with a lien? Your auto loan lender is entitled to deduct your outstanding balance from the sales. If you sold the car for $30,000 but the outstanding balance was $18,000, you’ll go home with at least $10,000. The $2,000 goes to sales tax, loan administration fees, and other DMV charges.
3. Who can put a lien on your car?
1. Mechanic’s lien
Have you ever heard of a mechanic’s lien? It entitles an unpaid mechanic to legally claim a portion of your car. For instance, you had serious engine problems and the mechanic did a good job amounting to $5,000. However, three months have elapsed and he hasn’t received a dollar. At this point, he can file a mechanic’s lien worth $5,000.
What does this mean? One, you cannot sell your car without the mechanic’s approval. After gaining approval, your mechanic deducts his $5,000 before you get your share of the sales. However, if you had an auto loan, the bank deducts your outstanding balance first.
2. Private debts
If a friend or relative lent you a significant amount of money and you haven’t honored payments, they can file a lien on your car. However, this is a measure of last resort because it strains relationships indefinitely.
In this situation, your creditor hires an attorney to sue you for non-payment. If you lose the case, your debtor’s attorney applies for a lien against your car. That enables them to hold on to it including your car title until you pay up.
4. How to buy a car with a lien on it
It’s possible to find a really nice car that has a low fuel consumption rate, mileage, and great engine performance, however, there’s one major problem. A lien that prevents the current owner from selling the car to you.
Here are four important steps you should take when purchasing a vehicle that has a lien on it.
1. Request to see the car title
The car title is a credible indicator of ownership. If your seller doesn’t have one, then it could be due to two reasons. He or she wants to sell you a car that has an outstanding car loan balance. If not, then you might be dealing with a car thief.
Remember to check whether the Vehicle Identification Number (VIN) on the title matches with that on your dashboard.
2. Download a Vehicle History Report
This document provides important information about the vehicle’s condition and current liens. You can get it at your State DMV or CarFax. This document helps you to verify whether the seller disclosed all liens during your initial encounter.
3. Introduce yourself to the auto loan provider
If the seller has a current auto loan balance, ask them to introduce you to their credit lender. Doing this enables you to know whether the bank has authorized the sale. However, the main reason for this meeting is it enables you to discuss how and when the seller will clear their outstanding debt.
4. Have all parties sign a written agreement
In order to hold each party accountable, you need a written agreement for three important reasons. It serves as proof that the bank or credit union allowed the seller to sell the car with an outstanding loan balance. Two, it indicates that the seller is responsible for clearing their auto loan balance by a specified date. The final reason is that all three parties have agreed on the mode of payment.
You may need an attorney to create your written agreement and create an escrow account to oversee the transaction.
5. What are the cons of buying a car that has a lien on it?
1. Not ideal for someone in urgent need of a car
A car sale involving a lien might take several weeks. If the seller needed money to pay an urgent hospital bill, they may need extra time to clear their outstanding auto loan debt. This isn’t ideal for a college student who needs a car for daily transport.
2. The transaction is time-consuming due to numerous negotiations
This type of car sales takes a significant amount of time due to several meetings. Issues arise when choosing the mode of payment since some sellers want to receive the cash directly and then pay the bank. On the other hand, you don’t trust the seller. It might take several days for both parties to settle on an agreed mode of payment.
3. You cannot insure the car without the title
Car insurance companies cannot insure your car without proof of ownership. The written agreement between you and the seller cannot serve as proof of ownership. If you’re paying the price in installments, you’ll have a hard time explaining yourself to police officers on the road.
4. No warranties transferred to you
In this situation, any benefits that the seller enjoyed from their car dealership cease after you receive the car. You’ll have to spend your own money on all repairs and maintenance.
5. Taking on an outstanding auto loan poses high financial risks
If the seller agreed to lower the price in exchange for you taking over their outstanding auto loan, it comes with major risks. Any late payments will affect your credit score. In case the seller has a reputation of imposing hidden charges, you’ll have to bear the unpleasant surprise.
6. Bottom line!
Buying a car with a lien should be your last resort because any sale that involves more than two parties has a high chance of getting complicated. If you really need an affordable car, work on improving your credit score to get better deals on your future auto loans.