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Written by:
Shivani Gite
Contributing Writer
Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions. When not writing, you can find her reading a book or watching anime.
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Reviewed by:
Laura Longero
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Executive Editor
Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.

Liens are a byproduct of “contract law”. Contract law is the constitutionally protected right of individuals and companies to engage in business through contracts. Contracts are legally enforceable documents and events; they allow economic activity through agreements.

An auto lien is a document given legal authority by state and federal statute; it confirms a claim that the holder of the lien has upon a specifically identified vehicle.

When you purchase a car, you usually have two ways to go. Either we have the cash to buy the vehicle, or you don’t. If you have the cash to buy the car, the car dealer will give you a “clear title”. This means your purchase is not encumbered with a loan, which creates a lien.

If you do not have the funds on hand required to buy the auto, then you must find either a bank, credit union, or finance company that will give the seller the funds required. Especially if you are buying a new car, you might not have $20,000 or $30,000 cash in your savings account.

What is a lien?

A loan is not a lien, and a lien is not a loan, but they are sort of legally intertwined with each other. A loan is simply someone giving you (your car dealer or individual) money with your promise to repay that money with interest to the entity that loaned it.

The one who loaned you money wants some protection for himself in case something happens that causes you not to be capable, at some point in time, of making those car payments. It is a lien. An auto lien means the one who gave you the loan can legally take your car from you (called repossession) if you do not pay for it under the terms of the “loan contract” which you agreed to at the time of purchase. Again, a loan is a loan, and a lien is a lien.

What rights does a lien holder have?

A lien holder has another right to insist you protect his asset. That’s why “full coverage” is required whenever there is a lien. A lien holder can even set limits on how high your deductible or how low you can go on liability coverage.

That’s why any car insurance calculator will ask whether you own the car outright. If it’s your car and yours alone, you are not required to buy collision and comprehensive coverage.

Hypothetically, if you borrowed funds from someone to buy a car, but the friend did not require the car as collateral (no lien), then he could not legally repossess your auto since he never had a lien on the car. The loan he gave you was simply an “unsecured” loan, meaning there was no security, or collateral, or no lien.

Liens can occur for many different reasons, but in a nutshell, it just means that someone has a prior claim to your property, whether a car or something else, until you can “clear the lien.”

Additionally, if you have borrowed money for a car with a lien, you will need comprehensive and collision insurance on your policy with your “loaner” listed as the lien holder.

— Michelle Megna contributed to this story.

Laura Longero

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Laura Longero

Executive Editor

Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.

John McCormick

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John McCormick

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John is the editorial director for CarInsurance.com, Insurance.com and Insure.com. Before joining QuinStreet, John was a deputy editor at The Wall Street Journal and had been an editor and reporter at a number of other media outlets where he covered insurance, personal finance, and technology.

Leslie Kasperowicz

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Leslie Kasperowicz

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Leslie Kasperowicz is an insurance educator and content creation professional with nearly two decades of experience first directly in the insurance industry at Farmers Insurance and then as a writer, researcher, and educator for insurance shoppers writing for sites like ExpertInsuranceReviews.com and InsuranceHotline.com and managing content, now at CarInsurance.com.

Nupur Gambhir

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Nupur Gambhir

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Nupur Gambhir is a content editor and licensed life, health, and disability insurance expert. She has extensive experience bringing brands to life and has built award-nominated campaigns for travel and tech. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service.

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Contributing Writer

Shivani Gite is a personal finance and insurance writer with a degree in journalism and mass communication. She is passionate about making insurance topics easy to understand for people and helping them make better financial decisions. When not writing, you can find her reading a book or watching anime.