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.

What is a lien on a car?

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.

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.

A lien holder has another right to insist you protect his asset. That’s why “full coverage” is a requirement 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.

While on the subject of liens, be aware there are all kinds of liens, and there are many reasons a property may have a lien on it. For example; real estate, assume a home and lot came into a situation where the home was paid off, no money was owed, and a clear title to the property existed.

Each year there was a property tax bill that was due on the home and lot. For reasons unknown, the owner became unable to pay the property tax, so after a period of time the taxing authority had the legal ability to do so, and they placed a “tax lien” on the property. In this example, the owner could not legally sell his property without the taxes due being paid because the taxing authority had a prior claim to the tax money. So, in the house closing documents, a provision for the payment of the taxes would have to be worked out between the buyer and the seller so that a clear title could be issued at the time of sale. Otherwise, no sale can occur.

This is just one of the numerous possibilities in the world of liens. 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 are able to “clear the lien”.

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

— Michelle Megna contributed to this story.

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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.