When someone buys a car with the help of an automobile loan, the lender wants security that it will be repaid. Cars are naturally mobile, unlike real property, so the lender wants to be sure the new owner doesn't disappear in a puff of exhaust.
Ownership of cars, like real property, is evidenced by title documents issued by the state agency in charge, often called the Department of Motor Vehicles, or DMV. Lenders make sure the vehicle isn't sold out from under their loan by putting a lien on the car title. The lien is listed on the title and gets released only when the loan is repaid in full.
What Is a Lien?
A lien is a legal right that protects a lender's interest in the property that secures the loan. The idea of a lien is to prevent the sale of that property without payment in full of the loan. It also serves as security for the lender since, if the borrower fails to keep up payments on the debt obligation, the lender may be able to seize the asset and sell it.
What kinds of property are subject to liens? Any type of property for which ownership is evidenced by a title can be attached with a lien. That includes real property and motor vehicles, too.
How Does a Car Lien Work?
Any person or entity that lends money to someone to buy a vehicle can secure the debt with a lien. When the buyer borrows money to purchase the car, the lender not only requires her to sign a lien form, but also files that lien on the vehicle with the state. It is listed on the vehicle title, and the title cannot be transferred to a new owner without first paying off the lender.
What Is a First Lien?
More than one creditor may loan money on property and secure the debt with a lien, and the priority order of the liens can be important. If the borrower fails to keep up payments, and the lender seizes the asset to sell, the first lien gets paid back first. Since most vehicles diminish in value over time, the first lender may be the only one to get its money back in full.
What Is a Lien Release?
Once the owner of the vehicle has repaid the lender in full, he can get the lien released. If that is the sole lien on the vehicle, the release makes it possible for the owner to sell the car.
When the final payment on a car loan is processed by the lender, the lender usually forwards a lien release document to the borrower within a month's time. At that same time, the lender notifies the state agency in charge, usually the Department of Motor Vehicles, that the loan has been paid and the lien released.
A car owner who does not receive the lien release should ask the lender for one or request proof that the loan has been satisfied. In some cases, the owner can make this request through the DMV. The lender should send the lien release or lien satisfaction documents forthwith.
How to Get Clear Title
Once the DMV receives verification that the loan has been paid and the lien released, the agency will issue the owner a new title. In order to obtain the new title, the owner must bring in the old title. If she has lost the old title, she will have to fill out the required paperwork to have it replaced before she can take the next step and obtain a new title that does not list the lien.
The new title will show that the lien has been removed from the car title. If the car owner had only that one lien, the car title will then be free and clear. If the car title has a second lien, that lien moves up into first lien position.