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Buying a car with a lien can be a tricky transaction, but with research and good communication, it's possible to resolve any outstanding claim on the vehicle and seal the deal. If you're thinking about buying a used vehicle from a private seller, here's how to ensure proper transfer of ownership.
What Is a Lien on a Car?
A lien is a legal claim to an asset, and when you take out a loan to buy a car, the lender becomes the lienholder until you pay off the debt. If you fail to repay the loan, the lien entitles the lender to repossess the vehicle and sell it at auction to recoup the remaining balance.
However, if you pay the loan in full, the lender removes the lien from the title and transfers it to you. At that point, you own the vehicle free and clear.
Learn more >> What Is a Lien and How Does It Work?
How Do You Check if the Car You're Buying Has a Lien?
Before buying a used car from a private seller, it's crucial that you run a title search, even if the seller claims that they own the vehicle outright. In addition to ensuring proper transfer of title, it's a good way to weed out potential scammers.
To run a title search, get the vehicle identification number (VIN) from the seller. Then, contact your state's department of motor vehicles (DMV) to find out who holds the title of the vehicle. Some states allow you to search title records online, but others may require you to visit a local DMV office.
How to Buy a Car With a Lien
When buying a used car from a dealership, you typically don't need to worry about outstanding liens. Dealers often buy used cars via trade-ins and pay off any outstanding loans before reselling the vehicles.
If you're buying from a private seller, however, you may come across a vehicle that still has a lien on it. Here are some potential ways to complete the transaction.
Ask the Seller to Pay Off the Loan
The simplest option for the buyer is to request that the seller pay off the loan before selling the car to you. Once they pay off the debt, the lender will send them the title, at which point they can transfer it to you.
The only drawback is that it can take a while for the seller to receive the title. While some lenders may only take seven to 10 business days, others may take up to six weeks. If you need a vehicle urgently, you may be unwilling to wait that long.
Pay Off the Loan Yourself
If you'd rather not wait for the seller to pay off the loan, you may be able to do so yourself. With this option, you'll need to coordinate payoff with both the seller and the lienholder.
For example, if you're buying a vehicle for $10,000, and it has an outstanding loan balance of $5,000, you'd pay $5,000 to the lender directly and pay the remaining $5,000 to the seller. Once the lender removes the lien, it'll transfer the vehicle's title to you instead of the seller.
To do this, you may need to provide the lender with documentation for the sale, such as a bill of sale and odometer disclosure statement. This option may be relatively straightforward if the lender has a physical branch you can visit with the seller.
Take Over the Loan
In some instances, you may be able to assume the seller's loan instead of paying it off. While most auto lenders typically frown on this option, it may not hurt to ask.
Have the seller reach out to their lender to find out if the loan is assumable. If so, the lender will typically ask you to fill out a loan application to ensure that you're eligible. You may also need to provide a bill of sale and other documents to switch the loan and the title over to your name.
Should You Buy a Car With a Lien?
Buying a car with an outstanding lien can be a common occurrence in private-party transactions, and it may be worth it if you can get a better deal from a private seller than from a dealership.
However, it's crucial that you do your research before agreeing to the sale. If you discover an outstanding lien when the seller has told you they own the vehicle free and clear, it could be a sign that they're trying to scam you.
If there is an outstanding lien, discuss your preferred option for resolving the lien and transferring the title to you. If you can't come to an agreement that you feel comfortable with, it may be better to walk away.
Learn more >> Used Car Scams and How to Avoid Them
Make Sure Your Credit Is Ready for a Car Purchase
If you're planning to take out a loan to buy a used car, it's important to evaluate your creditworthiness long before you even start shopping for a vehicle. Improving your credit can help you secure a lower interest rate, but it can also take time to accomplish your goal.
With Experian's free credit monitoring service, you'll get access to your FICO® Score☉ and Experian credit report. With these resources, you can get a sense of where you stand and also receive insights about which steps you can take to increase your credit score.
After you complete the car purchase, you can continue to build and maintain good credit with real-time alerts and educational resources.