The main difference between liens and loans is that loans are a form of financing and liens are security guarantees. When financial institutions lend money for a car, they place a lien on the title, which means they technically own the car until the loan is repaid. Loans and liens must be dealt with before private parties buy or sell a car.
We’ll demystify loans and liens and introduce you to how DealNow can keep your next auto transaction on track regardless of its financing status.
A loan is money borrowed from a lender with a repayment promise over a set period. When you finance a vehicle, your auto loan is the money you’ve borrowed to purchase the car.
You agree to make monthly payments until you’ve paid back the loan plus interest according to the loan agreement. Until then, you don’t own the vehicle, even though you possess and use it.
A lien is a legal claim a lender places on a vehicle to secure a loan. It gives the lender (the lienholder) certain rights to your car until you’ve satisfied your financial obligation.
Think of the lien as the lender’s insurance policy. If you stop making loan payments, the lien gives the lender the right to repossess and sell the vehicle to recover their money. The lien appears on your car’s title, making the lender a legal owner alongside you until the loan is paid off.
Lenders place liens on vehicles to protect their investment. When a bank or credit union loans you thousands of dollars to buy a car, they need assurance they’ll get their money back.
Here’s why liens are part of the lending process:
Without the security provided by liens, lenders would need to charge higher interest rates to offset the increased risk.
Sellers with an auto loan don’t control the title. The lender holds it until the loan is paid. This means sellers can’t hand over a title at the time of sale. Instead, they need to engage the buyer in a complex payment process where either the buyer deals with the lender or pays the seller so they can pay the lender.
Buyers and sellers face even more problems if the seller has negative equity in the car. Imagine you financed a new car, drove it off the lot, and suddenly have an emergency that requires you to sell. Since new cars lose about 10% of their value when they leave the lot, your loan might be upside down; the value of their car on the private marketplace is lower than the loan balance. You would need to sell the car and give that money to the lender plus pay the difference. This means either finding a buyer who is willing to pay upfront or finding a buyer who is willing to spend time coordinating with you and the lender in a complex payment arrangement.
Since most new vehicles are financed, many newer-model used cars have liens. This drives buyers toward older-model cars or higher-priced dealership cars since, until now, the private-party transaction process for vehicles with liens has been complex and risky.
We created a solution that makes buying or selling a car with a lien as simple and secure as any other transaction. In most cases, buyers and sellers can transaction financed used vehicles in an hour or so, anytime, anywhere—a feature you won’t find anywhere else.
DealNow eliminates the guesswork by verifying the loan details with the lender. Our system detects existing loans through credit report data and confirms the payoff amount with the lender in real time.
When the deal closes, DealNow automatically distributes the funds where they need to go: the loan payoff amount goes directly to the lender, and the remaining sale proceeds go to the seller. This eliminates the risk of the seller receiving funds and not paying off the loan.
DealNow generates all documentation, including power of attorney for the seller to sign, lien release authorization, and other documents required by the lienholder. We handle document submission to the lender, and you can track the entire process.
DealNow manages the title release process, submitting all required documentation to the lender and sending the title to the buyer. Both parties can finish the deal on the spot, and the buyer can pay knowing a new, clear title will arrive by mail in a few weeks.
Other attempts to resolve the lien problem in private-party sales typically involve:
DealNow combines the trust of escrow with instant digital processes to address the issues that cause transactions to fail. Our direct connection to lenders makes it easy for money to move from buyer to lienholder and seller.
Not only do we cut the risk and time out of transactions involving liens, but the process is hardly more complex than a regular DealNow transaction, which is already lightning-fast. Here’s how the process works:
What used to require multiple trips to banks, uncertain waiting, and significant trust between strangers now happens on one platform in an hour or so.
Ready to buy or sell a car with an existing lien? Try DealNow and experience the simplest way to handle complex vehicle transactions.
Involuntary liens can be placed on your vehicle without your knowledge. While a financing lien requires your consent when you sign the loan contract, other types of liens such as judgment liens, tax liens, or mechanic’s liens can be placed on your vehicle following legal judgments, unpaid taxes, or disputed service bills. Occasionally check your vehicle history report to keep tabs on your lien status.
A lien doesn’t impact your credit score. However, the loan associated with the lien and your payment history on that loan affect your credit score. Making monthly payments on time helps build a positive credit profile, while defaults in payments can severely damage your credit rating. If a car is repossessed due to non-payment, it can reduce your credit score by 100 points or more and remain on your credit reports for seven years.
Voluntary liens are those you agree to as part of a transaction, like the financing lien that comes with an auto loan. You accept a legal claim on your vehicle in exchange for the funds to purchase it.
Involuntary liens are placed without your consent. These include government-issued liens such as property tax liens, federal tax liens, judgment liens from lawsuits, and mechanic’s liens for unpaid repair work. Involuntary liens are imposed on you following unpaid debts or legal judgments.
You can sell a car with negative equity (when you owe more than the car is worth), but you’ll need to cover the difference. When using DealNow, the system calculates the payoff amount and shows how much money you’ll need to contribute to clear the lien. The buyer pays the agreed sale price, you contribute the difference, and DealNow sends the payoff amount to the lender.
If your lender goes out of business, your loan and associated lien don’t disappear. The loan contract is sold to another financial institution or asset management company. The new lienholder should contact you with updated payment instructions. If this doesn’t happen, don’t stop making payments—this could lead to defaults and repossession. If no one reaches out to you, contact your state’s banking commission or the FDIC to identify the new loan servicer.
Vehicles with liens typically require more auto insurance coverage than those owned outright. Most lienholders require borrowers to maintain full coverage, including comprehensive car insurance coverage and collision insurance, until the loan is paid off.
This protects the lienholder’s interest in the asset in question should it be damaged or destroyed. Once you pay off the loan and the lien is removed, you can adjust your insurance to match your needs rather than the lender’s requirements.
A vehicle can have simultaneous liens. Beyond a financing lien from the auto loan provider, a car might also have additional liens, like mechanic’s liens, tax liens, or judgment liens. These liens typically follow a priority order, with the primary lienholder (usually the bank or financial institution that financed the purchase) having the first claim on the asset.
After making your final loan payment, it typically takes 10–30 days to receive a clear title, depending on the state and lender. The lender processes the final payment, generates a lien release document, submits it to the DMV, and the DMV produces a new title showing you as the legal owner.
While specific laws vary by state, generally, a lien holder can repossess your vehicle without advanced warning in the event of default on your loan agreement. Most auto loan contracts include clauses allowing for repossession after a certain number of missed payments—typically one or two.
Most lenders will try to contact you before taking such action, as repossession is expensive for them too. To avoid repossession, contact your lender if you anticipate payment difficulties—they may offer payment plans or temporary relief during financial difficulties.
DealNow is the easiest way to close your own vehicle deal, anytime. It’s the safe and simple way to avoid fraud, sign documents, and instantly transact, all in one app.
