There are two main ways to buy a car: pay cash or finance your purchase (i.e. take out an auto loan and pay it off over time). You can probably guess which option is more popular — as the average price of a new car has topped $45,000, it’s not surprising that a whopping 86% of new vehicles purchased in the US were financed in Q2 2020 according to Statista.
While financing a car can be a convenient way to purchase a vehicle without decimating your savings, it could cost you more than whatever interest rate your lender is charging. We’ll explain why and what you can do about it below.
What is a lienholder?
A lienholder is a lender who holds a lien (legal claim) on something you own because they lent you the money to purchase it. In the case of financing a car, the lienholder is your auto lender — whether that’s your bank, the car dealer, or an individual — and the “something you own” is your vehicle.
When you finance a car, your lender is considered the legal owner and may be listed on the vehicle title and your auto insurance policy until you pay off your loan and own the car outright. The lien basically gives the lender (your lienholder) a guarantee that it’ll receive repayment for your loan — either through your payments or repossession of the vehicle if you stop making payments.
If you’re not sure whether your vehicle has a lienholder, check your car’s Certificate of Title or your state’s DMV website, or run a Vehicle History Report (VHR).
Who needs a lienholder?
A lienholder is only needed if you financed your vehicle (i.e. have a car loan). If you paid for your car in cash, you own the car in full. If you’re leasing it, you’re basically renting it until your lease is over — you’re not giving someone money to eventually own the vehicle.
In rare cases, a mechanic may place a lien on your vehicle if you don’t pay your bill, but it may need to be approved by a court to be added.
How do lienholders impact car insurance?
Your lienholder can require you to purchase certain types of car insurance to protect their investment.
States usually only require liability insurance, which covers injuries to others or damage to their property — but doesn’t cover your car. Since the lienholder legally owns your car until you pay off the loan, they often require you to purchase insurance that’ll cover it if it gets damaged or stolen.
In practice, this usually means they’ll require you to get “full coverage” car insurance (comprehensive and collision insurance) — sometimes with a specific deductible amount — and add their name to your insurance policy. Collision insurance covers damages to your car from collisions, while comprehensive coverage covers theft and damage that happens to your car when it’s not being driven (think car branches falling on your car, animals running into it, hail, etc.).
If your policy coverage doesn’t meet the requirements of your lienholder, they might take out their own policy on the vehicle (often called force-placed insurance) and make you pay the premiums in addition to the policy you have.
Should your car get damaged, the money paid out by your insurance may be addressed to both you and the lienholder, and they may not endorse the check until you agree to certain stipulations. For example, they might want proof you actually used the money to repair the car. And if the vehicle is totaled or stolen, your insurance provider is required to reimburse the lender for their remaining interest before you receive anything.
Once you pay your loan off and remove the lienholder from your policy, you have full control over what car insurance to buy (though you do need to hit your state’s minimum).
What is a lienholder on a car title?
The lienholder listed on your car title is your auto loan lender. They’ll usually appear on your car title (or, in some states, keep the title) until you pay off the loan. The process generally looks something like this:
- The lienholder files the lien with your state’s transportation agency or department of motor vehicles.
- When you pay off the loan, they send a lien release document to the appropriate state transportation agency.
- The car title gets updated and transferred to you.
How to add and remove a lienholder from your auto insurance policy
It’s relatively easy to add a lienholder to your auto insurance policy. First, adjust your policy to meet the lienholder’s requests (remember: they’ll usually require full coverage, which means you may need to add collision and comprehensive coverage with specified deductibles). Then, ask your insurance company to add the lienholder to your policy and notify the lienholder when they’ve done so. Finally, follow up with the lienholder to make sure the paperwork was filed properly.
To remove the lienholder from your policy, you’ll usually need to prove to your insurance company that you own the vehicle outright (for example, show the updated car title that only lists your name). Once you do that, they should be able to help you remove the lienholder from your policy — and adjust your policy if you wish.
While the insurance your lienholder requires can come in handy if you get into an accident or your car gets stolen, you’ll likely need to pay higher monthly premiums for this additional coverage. The good news is you could pay less with Metromile than with other insurance providers since the rate you pay for comprehensive coverage and collision coverage is based on your driving habits. Get a free quote to see how much you could save today!