The title to a car is a legal document of ownership. If a car title has a lien, that means the lienholder has a legal claim to the car. For example, if you have a car loan, your lender is the lienholder until the loan is fully paid off.

Here’s what you need to know about a lienholder on a car title and how it affects your car insurance.

What Is a Lienholder on a Car Title?

When you borrow money to buy a car, the amount of money you owe your lender is a lien. Your lender holds the car’s title and is considered the legal owner until your loan is paid off. The lien allows your lender to repossess your car if you stop making payments.

A lienholder could be a:

• Bank
• Credit union
• Private individual

Can My Lienholder Require Me to Buy Car Insurance?

Yes, your lienholder can require you to carry certain types of car insurance. There may be a clause in your loan agreement that specifies what coverage types and the amount of insurance you will need.

Typically, your lienholder will require you to buy collision and comprehensive insurance. These are two separate coverage types that pay to repair or replace your car if it is damaged by a covered problem, including car accidents, hitting an object, car theft, vandalism, fire, hail, falling objects, floods and collisions with animals.

If you took out a loan to buy your car, some lenders will also require you to buy gap insurance. This coverage type pays the “gap” between what you owe on your car loan or lease and the depreciated value of your car if it is totaled due to a problem covered by your policy, like a car accident or fire.

Your lienholder might have other car insurance requirements as well, such as the amount of liability car insurance you will need to buy. While your state determines the minimum amount of liability car insurance you need to have, your lienholder could require higher amounts of coverage. Your lienholder could also determine your car insurance deductible amount.

Once your loan is paid off, you no longer have to carry any optional coverage types that were required by your lienholder. But if you drop collision and comprehensive insurance, you won’t be covered for certain problems. For instance, you’ll have to pay car repair bills out of pocket if you’re at fault for a car accident and do not have collision insurance.

What Other Types of Insurance Should I Buy for a Car with a Lienholder?

An optional coverage you might want to consider is new car replacement insurance. This coverage pays for a brand-new car of the same make and model instead of the depreciated value of your totaled car.

New car replacement insurance usually has age and mileage requirements, depending on the insurance company.

For example, Farmers car insurance replaces a car of the same make and model if it’s within the first two model years and has fewer than 24,000 miles.

How Do You File a Car Insurance Claim if you Have a Lienholder?

If your car has a lien and it is damaged due to a problem covered by your policy (like a car accident or fire), filing a car insurance claim with your insurance company begins with the same basic process:

• Make sure you are safe at the scene of the accident and get medical treatment, if necessary.
• Take photos and exchange information at the scene of the accident.
• Contact your insurance company to file a claim.
• If the police were involved, get a copy of the police report.

An insurance claims adjuster will be assigned to your claim and will assess the damage to your car. After a settlement has been reached, your insurance deductible will apply and your insurance company will issue a check. The lienholder may receive the insurance check. In some cases, the check may be written out to both you and the lienholder.

The lienholder will likely require you to fix your car and may ask you to sign the check over to them to pay the auto body shop directly. Or the lienholder may require you to show documented proof that the car has been repaired, then sign the check over to you to pay the bill.

Related: How to cash out an auto insurance claim check

How to Add or Remove a Lienholder from Your Car Insurance

If you have a car loan, your insurance company will likely require you to list your lienholder on the insurance policy. To remove the lienholder from your policy, you’ll need proof that you own your vehicle. Once you have paid off your car loan, your lender will send the original title to you. In some states, you may get a lien release instead.

Once you have possession of the title or a lien release, contact your insurance company and provide them with proof that you own your car. Your insurer can then remove the lienholder from your car insurance policy.

What is the Difference Between a Lienholder and a Lessor?

Here’s the key difference between a lienholder and a lessor:

• Lienholder: When you finance a car, your lending company is the lienholder until your car is fully paid off.
• Lessor: When you lease a car, the party responsible for your lease is called a lessor. Since you don’t own the car at the end of your lease, there’s no lienholder involved, though you may have the option to buy the car or extend your lease.

How Do I Find Out if a Car Has an Outstanding Lien?

If you have the vehicle identification number (VIN), you can usually find out if there is an outstanding lienholder by contacting your state’s department of motor vehicles or using their online VIN checker tool.

You can also use a service such as AutoCheck or CarFax to determine if a car has a lien. While these services cost money, you can also get other useful information, such as the car’s accident history, service history (such as a transmission replacement) and worrisome title brands, such as fire, flood or hail.

Related: How to find out a car’s history

Can I Buy or Sell a Car That Has a Lienholder?

Yes, you can buy or sell a car that has a lienholder, but buying or selling a car with an outstanding lien can be tricky. That’s because the lienholder legally owns the car and you cannot get possession of the title until the lien is paid off.

If you are the seller, you’ll need to have the lien paid in full before you can transfer the title to a new buyer.

Selling a car with a lien

To sell a car with a lien, start by gathering the following information about the vehicle:

• Payoff amount. Ask your lender how much you still owe on your loan.
• Car value. Find your car’s value using resources such as Kelley Blue Book or the National Automobile Dealers Association.
• Amount of equity. Calculate whether you have positive or negative equity by subtracting the payoff amount from the value of the car.

If the amount of equity is negative, that means you owe more than what the car is worth, or you’re “upside down” on your loan. If you have negative equity and you’re selling your car privately, you typically must pay your lender the money you receive from selling the car, as well as the amount that equals your negative equity.

For example, if you still owe $10,000 on your car and have a buyer purchasing it for $7,000, then you would pay your lender the $7,000 for the sale and the remaining $3,000 out of pocket. You and your lender would sign the title and give it to the buyer, who can get a new title and registration.

If you have positive equity—the balance on your loan is less than the car’s value—the buyer would usually pay your lender the total sales price. Your lender would then pay you the difference. For instance, if you owe $10,000 on your car and are selling it for $15,000, your lender would get $15,000 and then give you $5,000.

Now let’s suppose you’re trading in a car with negative equity at a dealership because you want to buy another car. The dealership may suggest rolling the balance of your loan into your new car loan or subtracting it from your down payment. This would be the amount after subtracting the value of your car from what you still owe on the loan. If possible, consider avoiding rolling the balance of an underwater loan into your next car loan. It increases your new loan amount and monthly payments, and it may also put the new loan in jeopardy of being upside down.

For instance, let’s say you still owe $15,000 on your car loan and it’s worth $10,000. If the $5,000 in negative equity is added to your next car loan or is deducted from your down payment amount, your monthly payments and loan amount for the next car increase.

Buying a car with a lien

If you are the buyer, make sure the lien is paid off before you complete the transaction. Non-payment of a car loan could result in the car being repossessed.

If a car has a lien, your lender may be able to work directly with the seller’s lender or you might have other options, such as an escrow service. Here’s a guide to buying a car with a lien.