Checking for liens is important when buying or selling a vehicle. But what is a lien? Learn what is a lien on a vehicle and how it affects your car-buying experience.
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Before diving into the finer points of liens, let’s look at the central question: what is a lien on a vehicle?
In simple terms, a lien is a financial interest in a vehicle that’s granted to someone else other than the car’s owner. This could be a bank, creditor or an individual.
A lien on a car usually exists to secure a loan where the vehicle serves as collateral. So, if you’re buying a new or used car the bank or the financing company would register a lien against the vehicle. If you default on the loan for any reason, the lien gives the lienholder an opening to repossess the car.
Liens that are registered against a vehicle in connection with a debt stay in place until that debt is repaid. Cars can have multiple liens at the same time. For example, if you take your car to a garage for repairs, the garage could enforce a mechanic’s lien until you pay the bill.
How to check for a lien on a car?
If you’re buying a car from a dealership, registered dealers are legally required to remove liens from used cars.
But if you want extra reassurance that a car is lien-free, or you’re buying a vehicle through a private sale, you can take the step of checking for vehicle liens yourself. You’ll need the vehicle identification number (VIN) to search for liens.
You can check for car liens by:
- Searching property registration records by province.
- Conducting a search through CARFAX Canada.
- Asking the seller directly to disclose lien records.
Some provinces require sellers to make lien history accessible to buyers but it’s still a good idea to do your own research. And remember that a car could have a lien in more than one province so it may be worth your time to perform multiple searches.
If you’re buying a car with a lien from a private seller, it’s up to you to make sure they hold up their end of the bargain and pay off the lien. Getting a written agreement specifying what they’ll pay off and when can give you some legal protection. Otherwise, the debt linked to the lien could follow the vehicle even if you’re the new owner.
Selling a vehicle with a lien
Technically, the answer is yes but selling the vehicle doesn’t free you from your obligation to repay the debt associated with the lien. You would have to pay off the debt, either from cash reserves or the proceeds of the sale, for a lien to be removed.
You could sell a car with a lien to a private buyer or to a dealership. A dealership could make the process smoother by either giving you cash for your trade-in or allowing you to restructure the lien debt into a new loan when you buy another vehicle.
If you want to sell a car with a lien against it, consider these things first:
- What is the car worth?
- How much is owed on your current car loan?
- How much money would you need to pay off the debt?
- Would selling allow you to clear the debt and turn a profit?
Assuming you aren’t underwater on the car, then selling could help you pay off the debt and pocket a little money. But if the car is worth less than what you owe, you may have to come up with cash to pay any shortfall between the vehicle’s value and the loan balance.
The pros and cons to liens
The pros and cons of liens depend on whether you’re the lender or the borrower.
For the lender, the chief pros of liens are:
- Security for the loan itself.
- Reassurance that the loan won’t be a total financial loss if you default.
On the cons side, the drawbacks of liens can apply to car buyers and sellers:
- If you’re trying to sell a car, you’ll have to pay the debt to clear the lien and finalize the sale.
- If you’re buying a car with a lien and the seller doesn’t pay off the debt, the debt then becomes yours.
In the worst-case scenario, you could buy a car with a lien on it and the lienholder decides to repossess. You’d be out of a vehicle and out of the money you put down and the monthly payments you made if you financed your used car purchase.
If you’re looking for a new or used vehicle, consider Birchwood Credit Solutions. We have an extensive inventory of cars, trucks, SUVs and crossovers. Go online today to apply for a pre-approved car loan.