Car Liens and How They Pose Problems for Used Car Buyers
When you’re shopping for a used car, one of the things that you should look out for is if it has an outstanding lien. If it does, and you buy it without knowing it, you could end up paying for something that the previous owner should be responsible for. Worse, you could have your vehicle repossessed. In this article, Carmudi helps you understand what a lien is, and why should always check this before sealing the deal on a used car.
What is a car lien?
Car liens act as a ‘collateral’ for lenders should the original car buyer default on his payments. Liens are created immediately whenever an auto loan is used to purchase a car. They act as the lender’s legal right to possess the vehicle until the loan is completely paid. If the buyer defaults on the loan, like failing to make payments, the lender can reclaim the car.
How is a lien different from a loan?
A car lien refers to the lender’s right against the vehicle they’re financing, while a loan is the money lent to the borrower. A car buyer can take out a loan on a vehicle, but it won’t necessarily be secured by a lien. An example of a situation where a loan does not have a lien is when a car buyer has an existing line of credit with the lender. When he uses this line of credit to pay for the vehicle, the lender may decide to forgo putting a lien on the vehicle.
Why is it important to check if a used car has an existing lien?
If you purchase a used car that still has a lien against it, the unpaid debt can become your responsibility. Lenders don’t care who owns their car, so long as they get paid. Thus, it doesn’t matter if you’re not the original vehicle owner, you still need to pay for the lien if you are the listed owner . If you don’t, the lender has the power to repossess the car from you.
How do you check for a lien?
There are a number of ways that you can confirm if the used car you’re looking at has a lien against it. Here are some tried-and-true methods to help you make sure a used car for sale is not carrying any liens.
Step 1: Inspect the paperwork
The first thing to do is to go through every detail of the vehicle’s paperwork with a critical eye, especially the title and certificate of registration (CR). While information may vary from one vehicle title to another, it should contain pieces of info that relate to past and current owners, as well as any past or current liens on the vehicle. As for the CR, if the vehicle indeed has a lien against it, the words “encumbered” should be clearly visible.
Step 2: Ask for additional paperwork if necessary
If the title reveals that the vehicle has a lien, ask the seller about its status. If the seller says the lien has been paid, ask to see the lien release called the ‘cancellation of the chattel mortgage,’ which is a legal document that proves the lien is closed. Should you decide to proceed with the vehicle purchase, make sure the seller hands all lien release documents to you. You never know when you’re going to need them.
Step 3: Visit the LTO
You can visit your local LTO office and request a Duplicate Certificate of Registration for Private Vehicles. This report will provide lien information, and in most cases, will inform you of any accidents and even crimes that the vehicle has been involved in. There is usually a small fee involved with this step.
Resolving the lien
You’ll have to deal with the lien before finalizing the purchase of the vehicle. If the seller has a copy of the lien release, have him bring the document to the LTO. Once the LTO confirms the document, the agency may then update their records and cancel the encumbrance on the next copy of the CR that they print, which should give you free and clear ownership of the car.