What is a lienholder?
Last updated: January 1
If you finance a car, a lienholder may be listed on your car's title and your car insurance policy until you pay it off. A lienholder is a lender that legally has an interest in your property until you pay it off in full. The lender — which can be a bank, financial institution or private party — holds a lien, or legal claim, on the property because they lent you the money to purchase it.
What is a car lien?
The amount you owe your car lender is called a lien. The lien provides the lender with a guarantee that it will receive repayment for your loan. If you have a lien, you'll likely need to pay off the vehicle before you can sell it. Similarly, if you have collision coverage and your car is damaged or totaled in an accident, your insurance will typically reimburse the lender for the amount of the lender's interest in the damaged car before you receive any remaining portion of the payment.
Lienholders and car insurance
Lienholders can require you to purchase certain car insurance coverages to help protect their investment if it's damaged or destroyed.
A lienholder may require that you purchase comprehensive coverage and/or collision coverage on your car insurance policy, says the National Association of Insurance Commissioners. Collision coverage helps pay to repair your car if it's damaged in a collision with another vehicle or object. Comprehensive coverage helps pay to repair your car if it's damaged by things like fire, theft, falling objects or natural disasters.
Once you've paid off your loan, collision coverage and comprehensive coverage are typically optional on your car insurance policy.
Extra insurance for a brand-new car with a lien
If you're the first owner of a brand-new vehicle, you may be able to buy additional insurance coverage to help protect you against losing money if your vehicle is totaled.
Loan or lease gap coverage is an optional car insurance coverage that helps pay the difference between the depreciated value of your vehicle and what you still owe the lender if your car is totaled in a covered loss.
In short, comprehensive and collision coverages typically pay up to the depreciated value (aka the actual cash value) for a totaled vehicle. But, if the depreciated value is less than what you still owe on your car loan, you may have to finish paying off the lender, with your own money, for a vehicle that's no longer driveable. That's why it's important to think about buying additional coverage, like loan or lease gap coverage, if you're financing a brand-new vehicle.
Car liens and titles
When you borrow money for a car, it's common for your lienholder to keep the title, which is the legal ownership document for your car, explains Edmunds.com. The lienholder's name may also be printed on the car title, as legal reassurance that you can't sell the car until it's paid off.
When you fully repay your car loan, the lender can legally sign over the title to you or submit paperwork to your state's department of motor vehicles (DMV). These steps verify that your lender has officially "released" its lien on your car, explains Edmunds.com. At that point, the car is fully yours to keep, sell, or insure differently, as you see fit.
How to add or remove a lienholder from your car insurance
If you finance a car or refinance a car loan, your lienholder will probably require that you list them on your car insurance policy, the NAIC says. Contact your local agent for assistance in this situation. And, when you pay off your car loan, your insurance agent can help remove the lienholder's name from your policy. You'll likely need to provide proof that your loan has been repaid, such as a copy of your new car title that does not list a lienholder.