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.