What Happens If You Buy a Car With a Hidden Loan or Lien?

Buying a car can be a joyful experience, and many people choose the used car route because it is affordable and offers lower insurance rates. But that experience can quickly turn sour if you buy one with a hidden loan or lien. 

Getting a used car with a hidden lien is tantamount to unknowingly buying a debt. Depending on the amount, a lien may result in unforeseen financial obligations that could see you paying hundreds or thousands of dollars to keep your vehicle. It is therefore important to understand liens and take all necessary precautions before making a car purchase.

What Is a Car Lien?

A lien is a legal claim against a vehicle, usually by a lender, due to unpaid loans or debts. It is placed on a car as collateral for an outstanding balance. A lien could be placed on a car if the previous owner financed it with a loan or used it as security for another loan. If payments are not made, the creditor is legally entitled to the car. 

If you cannot or do not pay back the loan, the lien not only gives the lender the right to seize your car, but also to sell it at auction to recover the outstanding sum. The lender can remove the lien from the title and give it to you if you repay the loan in full. Only when you make the lien payment to the lender can you be considered the legal owner of the car.

How Do Hidden Loans or Liens Occur?

There are several scenarios where liens might be hidden or undisclosed by the seller while buying a used car. Pay particular attention when buying a new car in the following ways:

• Private Sales: One benefit of purchasing a car from a private seller is that it may be less expensive and offer even more negotiating leverage. However, it is riskier because the consumer-protection laws that guide registered dealers do not apply to private sellers. 
• Dealerships: Buying from a dealership provides more protection for you, as they are legally obligated to ensure that cars are lien-free under such laws and regulations as the Fair Credit Reporting Act (FCRA), the CARS Rule, the Federal Trade Commission's (FTC) Used Car Rule, and state lemon laws. However, it is not impossible to get a car with a lien from a dealer, as some dealers get their used cars through trade-ins.
• Trade-Ins: It is also possible to get a car that has a hidden lien or loan through a trade-in. However, the same protections that are available for someone who buys a car outright from a dealership also apply to you when you make a trade-in.

Hidden lien issues, especially in dealership sales, may be due to title issues or delayed lien releases. In such cases, you should get in touch with the dealer immediately. If the problem isn't fixed, send a complaint to the Consumer Financial Protection Bureau. 

Risks of Buying a Car with a Hidden Lien

Buying a car with a lien comes with serious problems, both in a financial and legal sense. The following are some of the risks associated with buying a car with a hidden lien: 

• Lender Reclaims the Vehicle: If you were sold a car with a hidden lien, you could lose the car to the lender or creditor, irrespective of whether you knew anything about the lien or the former owner’s arrangement. This is because the car’s genuine title is with the lienholder. The lien gives the holder a legal right to possess the vehicle against which the loan was made.
• Legal Disputes: Buying a car with a hidden lien can put you in a legal battle with both the seller who deceptively sold you the car and the lien holder who wants to recover their money. This can be a time-consuming and costly procedure that could affect your physical and mental well-being.
• Financial Loss: Getting a car that has a hidden lien could mean huge financial losses, depending on the cost of the car and the amount of the lien. The lien holder has the legal right to take back the car if the seller doesn't pay the lien, which would leave you without a car and no reimbursement.
• Title Issues: Purchasing a car with a hidden lien could mean that you do not have a genuine title. This, in turn, means that you won’t be able to legally register the car, transfer ownership, or obtain insurance. Without a valid title, insurance companies may be reluctant to insure a car, therefore, leaving you without coverage. Even after the lien is resolved, you will still need to request a new title from your local DMV (Department of Motor Vehicles) and present the legal lien document as proof of ownership. 
• Impact on Credit: A lien can have a detrimental effect on your credit, especially if you take over the loan. You may choose to assume the seller's loan instead of paying it off immediately; however, this can reflect badly on your credit, especially if you default on payment.

How To Check for Liens Before Buying

It is best to avoid purchasing a car with an outstanding lien, as this can happen frequently in private-party transactions. You should take some precautions to protect yourself because dealing with the fallout from purchasing a car with a hidden lien might be more difficult. Here are some practical steps you can take:

Request a Vehicle History Report 

Get a thorough vehicle history report using GoodCar to check for hidden problems or liens. This report contains the title and brand history for cars, including comprehensive vehicle information, online history, insurance, and title details regarding junk, salvage, flood, and more. When purchasing a used car, a vehicle history check can help you reduce the risk of a hidden lien and avoid costly errors.

Use State DMV or Motor Vehicle Agency Lien Check Services

State DMVs (Departments of Motor Vehicles) provide the option for you to check a car’s vehicle history. The specific procedures for obtaining this history depend on the state, but usually involve completing a request form or creating an account on their platform. Search “Vehicle History Report DMV for [State]” to find the specific instructions in the state where the car is registered.

Ask for the Car’s Title and Verify Ownership Status

Request the title and debt payoff information from the seller. You can request to see the signed title to determine the identity of the lienholder, but you won't receive it until the transaction is finished. Make a note of the payout amount when you view the payoff information. Ask the seller where the extra funds are coming from to pay off the debt if it exceeds the amount you are paying for the vehicle.

Search Lien Databases if Available

The federal database that houses vehicle data from states, insurance companies, and the salvage business in the US is called the National Motor Vehicle Title Information System(NMVTIS). Lien information may be found in this database. Note that lien data is provided through ADD (Auto Data Direct) and does not include information on all motor vehicles in the US because not all lienholders send information to this data source.

What to Do If You Discover a Hidden Lien After Purchase

If you discover that you have purchased a car with a lien, you can take the following steps to address it:

• Negotiate with the Seller: You may ask the seller to settle the debt. This could be challenging, though, because the sale may have been done on purpose. 
• Contact the Lienholder: You may also reach out to the lienholder to see what your options are. You may have to pay off the loan immediately or take it over.
• Take Legal Steps to Clear the Title: You could consult a lawyer to work on a lien release for your car through the courts.
• Dispute the Purchase: If you paid via credit card, you may be able to dispute the purchase as fraudulent and recover your money.

Preventive Tips to Avoid Buying a Car with a Hidden Lien

Since buying a car with a hidden lien can have serious implications, it is important to be cautious while buying a car. Here are some preventive tips that can help you avoid buying a car with a lien:

• Use a title check or DMV documents to confirm that there are no liens against the car. 
• Only buy from reputable dealerships that have great customer reviews.
• Make use of a bill of sale that specifies the conditions of the transaction, including the lien payment.
• Avoid buying cars from curbsiders; curbsiders typically sell vehicles with concealed liens. Red flags include evasive responses, unwillingness to meet at a residence, or improper documentation. 
• Get a vehicle inspection.
• Seek legal advice, as an attorney can tell you what your legal options are in the event you are sold a car with a hidden lien.

Buying a car with a hidden lien can lead to unexpected financial burdens, legal complications, and even the loss of the vehicle. To protect yourself, it is crucial to conduct thorough lien checks, verify ownership documents, and purchase only from trustworthy sources.