A lienholder is the bank or financial institution that gives you a car loan to help you buy your car. It’s basically a synonym for “lender.”
What is a lienholder?
Cars can be pretty damn expensive. If you don’t have the suitcase full of cash to buy your dream car outright, you can apply for an auto loan to cover the costs.
The lender will offer you the car loan with the car held as collateral. This means that if you don’t pay off the car loan, the lender can repossess the car. The bank is the lienholder, as they have a ‘lien’ on the car until it is paid off. The lienholder is listed on your title and car insurance.
In most states, the title itself is held by the bank until the loan is paid off. They own the car until the loan is paid off, at which point a lien release is performed.
That might sound like an exciting, magical rite performed by witches in the forest, but it’s unfortunately a lot more boring than that. The ‘lien release’ used to be a manual process, but now is often performed using an electronic lien removal through the Department of Motor Vehicles (DMV). At that point, you’ll receive a certificate of title, without the lien listed, making you the sole owner of the car. Congrats!
If you are leasing your new car, you’re not the owner, but rather a type of “renter,” if you will. In that case, instead of being a lienholder, the bank or lender owns the car.
How do you know if a car has a lienholder?
If you are thinking about buying a car from a private party, it’s important to find out whether the car has a lien on it. If the car has a lien, the lien would have to be paid off before you can buy, title, and register the car. The whole process can be tedious, so it’s important to know what you’re getting into before moving ahead with your purchase.
There are a number of ways to go about this.
The simplest way is to look at the car’s title, which should say if there is a lienholder. In many states, if the car has a lien on it, the car owner wouldn’t even have the title in their possession. When this is the case, the seller would have to process a lien release with the lender to “clear title” before they close the sale of the car.
You can also check with the DMV to see if their records show a lienholder on the car. They would require the vehicle identification number (VIN) to check for you. If you are getting a Carfax report on the car that you are purchasing, a lien may be listed on there as well.
Can I be required to have certain auto insurance coverage if my car has a lien?
When you buy a car and take out a loan on it, the lender has a financial interest in what happens to the car, because it is the collateral for the loan. In order to protect their financial interest, your bank will require you to carry certain coverages and limits in your car insurance policy, which will always be more than state minimums. You also won’t be able to carry just liability insurance (which you would be able to do if you owned the car outright).
You’ll likely need a certain level of liability insurance, collision coverage, and comprehensive coverage. If your car gets totalled, the bank wants to make sure that there is enough insurance coverage to cover the balance of your loan.
If you are involved in a car accident that totals your car, your insurance company will issue payment to the lienholder when one is indicated. If you have a lienholder and don’t carry the coverage requirements of the lender, they will force-place coverage on your vehicle and will require that you pay the premium charged for this coverage. Force-placed insurance is usually more expensive than what you’d pay for coverage on your own car insurance policy.
How do I add or remove a lienholder to my car insurance policy?
As you know, you’re required to carry a certain amount of car insurance coverage if your car purchase has been financed by a loan. (BTW, most financing companies only require you to get collision and comprehensive coverage, but if you lease a car you’ll probably need to get higher liability limits.) Your insurance policy would have to state the exact name of your lienholder, and proof of insurance would be provided to your lender.
So you might be wondering, how would you get your lender listed on your insurance policy? On a Lemonade Car policy you can add this info easily once you’ve purchased your policy, right through the Lemonade app. If you’ve got coverage with another insurance company you can let your agent or the insurance representative know that the car is being financed. They will include the lender information on the policy declarations. (After you’re done with that, go ahead and check our prices…you might just feel like switching.)
After you’ve paid off your loan, you’ll want to remove the lienholder from your policy. This, however, requires a bit more than a phone call. You’ll have to provide the insurer proof that the car has been paid off. This can come in the form of a copy of the title you’ve now received from the DMV, or your bank can provide you with a formal letter, which you also can use as proof.