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ComplianceFinanceNovember 02, 2023

Understanding lienholders: How adding or removing them can reduce loan risk

By: Wolters Kluwer Compliance Solutions staff

Lienholders are a longstanding part of the automotive industry. Lienholders are often financial institutions like a bank or credit union, but private parties may also work as a lienholder. They help people purchase cars via loans and offer additional protections for those looking to finance a vehicle. Working with a lienholder can reduce loan risk and give borrowers a different entity to work with besides the car manufacturer or dealer. 

But when is having a lienholder a good idea, and when should they be removed? Knowing how to mitigate risk best is an essential part of car financing, but it can be unclear when you should add or remove a lienholder from the title of the vehicle. This article will help you learn how to add lienholder entities to your financing agreement and remove them from your loan when it makes sense. 

What is a lienholder?

To begin, let’s talk about the definition of a lienholder. A lienholder is a party that holds a lien on your car. A lien means that the lender lending you the money to finance the vehicle holds the car's title until the loan terms have been completed. The lienholder will keep ownership of the vehicle until the loan is repaid or other conditions have been satisfied. 

Until the loan is paid off, the vehicle lienholder has an interest in the car. If the loan defaults or there is a problem with the payment, they are still responsible for ensuring the loan is paid. The lienholder holds the title of the vehicle until such a time that the loan is paid off and their interest in the car has ended. 

Adding a lienholder

The main reason people turn to lienholders is to purchase a vehicle without needing the entire payment upfront. By financing the car, they can drive and use the vehicle while paying the lienholder. 

Having a lienholder can provide many benefits. For example, they might offer lower interest rates and better loan terms than the dealership or vehicle manufacturer will provide with their financing options. Another benefit is that working with a lienholder increases the lender's trust in repaying the loan. It’s an extra guarantee that the loan is covered, which can help you negotiate better terms. 

Here is a step-by-step guide on how to add a lienholder to help you in your car financing journey:

  1. Contact the lender: Contact the lender to see if they will work with you and provide the necessary lien requirements.
  2. Filling out necessary paperwork: There is paperwork that needs to be filled out, which may differ from state to state. The lienholder can direct you to the proper forms.
  3. Meeting any lender requirements: Some lienholders have additional requirements, like having full coverage insurance on the vehicle during the loan period. Make sure you have proof that all conditions are met.

Removing a lienholder

Once a loan has been repaid or most of the terms have been satisfied, it may be time to remove the lienholder from the title. This gives you more flexibility and control over the vehicle and eliminates the additional restrictions the lender may have placed on the lien. 

To get a lienholder removed, follow this step-by-step guide:

  1. Confirming loan repayment status: Double-check and see that the loan repayment status has been satisfied. A lienholder cannot be removed from the title without fulfilling the conditions of the lien. 
  2. Contacting the lienholder: Contact the lienholder to inform them that you want to remove them from the loan.
  3. Completing necessary paperwork: Fill out any necessary paperwork to release the vehicle's title. 

How adding or removing lienholders reduces risk

The amount of risk you have invested in a vehicle can change depending on the circumstances of your lien. Sometimes, adding a vehicle lienholder reduces risk, and there are times when removing them is the best way to minimize risk. 

Adding a lienholder can reduce risk when you want more favorable terms from the lender, like better interest rates or smaller monthly payments. However, removing a lienholder can also reduce risk by giving you more control and flexibility over the vehicle and avoiding the potential of having your car repossessed by the lienholder in the case of payment default.

Considerations and cautions

As with all things, there are considerations to keep in mind as you look at working with a lienholder. Some liens can negatively affect borrowers' credit scores, and there may be associated fees when lienholders are changed. All lienholders will have legal obligations and responsibilities related to the loan. 

Before a change of lienholder status, consult with your lender or financial advisor. They can help you understand the best way to move forward to protect your interest and reduce risk with your lienholder.

Conclusion

Adding and removing lienholders is essential to vehicle financing. Lenders can benefit from working with a trusted partner.  Wolters Kluwer Lien Solutions has the expertise to assist with jurisdictional knowledge to make this a seamless process for lenders. 
Wolters Kluwer Compliance Solutions staff
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