How Does a Car Lien Work?

Introduction

Individuals who have the money to purchase a car without the need to take out a car loan don't have to worry about a lien holder. Many people, however, require financing from a bank or financial institution in order to purchase a car.

The finance company providing the funding has a co-ownership relationship with the car owner. As a result, it seeks to protect its financial interest by putting a lien on the vehicle. The lien remains on the car as long as the finance company has a financial interest in the vehicle. Once the lien is paid off, its interest is over and the lien is removed.

Loss Payee and Additional Insured

As a result of being a co-owner, the finance company must be listed on the car's auto insurance policy. The request to be listed as an additional insured and loss payee is not unusual. In the event of an auto accident in which the car owner is sued, the finance company, as co-owner, can be brought into the suit. Therefore, it must be added as an additional insured for protection in the event of a liability claim.

The lien holder is also included as a loss payee on the physical-damage section of the insurance policy. In the event of a total loss on the vehicle, the lien holder seeks to recoup its financial interest. The Loss Payee, Lien Holder endorsement ensures that the claim check will be issued in the name of the registered owner and the lien holder. The lien holder will take its portion of the outstanding balance and return the remainder to the registered owner.

Department of Motor Vehicles

To further ensure and protect the finance ompany's financial interest, all vehicles that are not owned free and clear display the lien holder on the vehicle's title. Therefore, the Department of Motor Vehicles has a record of the financial institution's interest in the vehicle and will not remove them as a lien holder until it receives documented proof from the financial institution that the lien is satisfied.

Default Payments

If the car owner defaults on the agreed monthly payment, the lien holder or co-owner of the vehicle reserves the right to take possession of the vehicle. Vehicle repossession reflects negatively on the car owner's credit.

Resources

• What is an auto lien?