How to Buy a Car with a Lien
Buying a used car from a private seller can be a better deal than buying from a dealer. Of course, there are risks with this type of auto purchase. In particular, there are risks in buying a car with a lien on it.
When you buy a car with a loan against it, the lender will place a lien on the vehicle to protect its investment. A lien gives allows the lender to repossess the vehicle if the borrower does not repay the loan. The lender (or lienholder) is technically the owner of the vehicle until the final payment. After receiving the final loan payment, the lender releases its lien and removes its name from the title. The lender formally releases the lien by sending the vehicle owner a letter of payoff and sending the proper paperwork to the DMV to transfer the title back to the owner.
Is there a lien on the Vehicle?
Before you buy a vehicle from a private seller, it's important to conduct a search to see if there are any liens attached to it. In general, if the seller can show you a vehicle title with the correct VIN and their name on it, it doesn’t have a lien. For safety, search for an outstanding lien is easy:
Get the vehicle identification number (VIN).
Visit your local Department of Motor Vehicles (DMV) office or website to find the name of the titleholder. You may also want to buy a vehicle report from a third-party service, like CarFax. Vehicle reports supply important information about the vehicle’s history and liens.
Steps for paying off a Lien
One approach is for the buyer to take over the loan payments. This is done by the seller and buyer working with the lien holder to transfer the payment reponsibility and vehicle ownership to the buyer.
The simplest and safest approach is for the seller to payoff the lien and transfer the title from the lienholder before the seller buys the vehicle.
When the vehicle owner is not able to pay off the lien, it takes several steps by the buyer and the seller to complete the transaction in a safe manor. These steps can be written into the “Bill of Sale”. The Bill of Sale should state what each party will do, the sequence of steps, and the dates they will be done by. For safety, the Bill of Sale should be signed in front of the Notary Republic.
The safest approach for buying a vehicle with a lien, is to pay off the lender directly. This approach puts the buyer in better control of the situation.
If the lien balance is less than the selling price:
The seller:
Sends the buyer the lien information needed to pay off the loan. For example, their last monthly lien invoice.
Notifies the lien holder that you are buying the car and that you will pay off the lien.
The buyer:
Contacts the lien holder and pays off the lien.
Gets the payoff confirmation from the lien holder and sends it to the seller.
Pays the seller the difference between the lien and the selling price (Price – Lien).
Pickups the vehicle
If the lien balance is more than the selling price:
The seller:
Notifies the lien holder that you are buying the car and the you will pay off the lien.
Pays the difference between the lien and the selling price (Lien - Price)
Gets a payment confirmation from the lien holder and sends it to the buyer.
Sends their last monthly lien invoice to the buyer.
The buyer:
Contacts the lien holder and pays off the lien.
Pickups the vehicle.
Is it a Scam?
A lender has the right to repossess a vehicle if the lien payments are late. They can repossess a vehicle you purchased, in spite of any money you paid to the seller.
If any of the following occur, it could be a red flag that someone is trying to scam you.
The seller didn't disclose that there is a lien on the vehicle.
The buyer or seller refuses to put the lien payoff arrangement in the Bill of Sale.
The buyer or seller refused to provide their identification confirmation, such as a photo of their driver license.
The information on the seller’s driver license and last monthly lien invoice are not the same (address, name, etc).
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