Should You Buy a Car With a Lien On It?

Buying a new car is a losing proposition. “But wait,” you say. “Look at all the bells and whistles this car has. It’s worth every dollar.”

According to Edmunds, after the first mile of ownership, your vehicle has already lost nine percent of its true market value. Think that’s bad? Over the first three years, your “new” car will lose 42% of its original true market value.

If cars were a stock, no one would ever buy.

Is buying a used car a good idea?

You might conclude that buying a car is a really bad idea. It doesn’t have to be. Since most of a car’s depreciation takes place in the first three years, it makes sense to look at used cars that have already absorbed most of their depreciation.

Ok, so let’s say you spend some time looking online for a used car. You find one you like, check it out, and decide to buy it. The deal looks like a no-brainer, right? Until the owner throws you a curveball. He tells you the car has a lien against it.

What’s a lien?

A lien is the right of a third party (such as a bank, or an individual) to claim ownership of a car until the loan has been paid off. If you’ve ever purchased and financed a car through a dealership, the lender held the lien against your car.

If you buy a previously owned vehicle from a dealer or used car lot, your deal will be easy. The original financier will have been paid off, and the dealer will own the title. If you finance your purchase, the bank will hold the lien. If you pay cash, you will own the title and there will be no lien.

Check out the DMV website for lien information

Things change a bit when you buy a car from a private party. Before entering into an agreement, you should run a check on the car’s history. The DMV has a comprehensive website and can give you information about ownership.

If you find that the seller still owes money on the car, buying it is usually not a big deal. The buyer makes out a check for the amount owed to the lien holder, and mails it to the company that holds the lien. It can take a few weeks for the title to be sent to the seller.

When does a buyer own the car officially?

This is where the transaction gets a little complicated. In the interim period, the seller is going to maintain possession of the vehicle until the title arrives. Meanwhile, the buyer has sent money to pay off a lien, and he’s not sure what’s going on with his car. Is the owner still driving it? What if it gets into a wreck?

The buyer can’t legally drive the car or insure it without the title so that’s where buying a car with a lien gets tricky.

To close the deal, the seller has to receive the car’s title from the lien holder in order to sign over ownership, and the buyer needs the signed title to register the car.

You shouldn’t give the seller money to have him pay off the lien holder. People can get flakey with money - they forget to send it in, they need a new pair of skis etc. - so if you hand over a few thousand in cash, you may never see the seller or your car again.

Not all liens are listed by the DMV

Then there are liens that may or may not show up in vehicle searches.

Property such as cars can have liens placed on them that you may never discover. If the seller has back taxes due to the IRS or state government there could be a lien on the car. Buyers are somewhat protected by IRS Code 6323(b)(2) which “prevents tax liens from interfering with the sale of your car unless the buyer had notice or knowledge of the tax lien at the time of purchase.”

If your seller knows about a federal tax lien when he sells the car, and discloses this information to you, it might be wise to walk away because you could be getting yourself into a three-way fight with the IRS, seller, and you.

Non-payment of child support could trigger a lien

Family court could also put a lien on a car if the seller is behind on child support. Some, not all, states follow some variation of this process: a state’s department of social services or a division in charge of child support places a lien on the vehicle the non-paying parent owns.

The department of social services or division in charge of child support sends a letter to the lien holder instructing them to return the cancelled title to the court or destroy it. The court then issues a new title and lists itself as the lien holder.

Spending money on a car isn’t the wisest investment, but for nearly all of us it’s a necessary one. Unless you’re buying a classic car as an investment, you’re guaranteed to lose money.

Making the case for considering a used car

Buying a used car makes better financial sense. Nearly half of the depreciation has been taken; if you buy a car from a dealer any car you choose will likely to be in near-new condition; and it probably still has the extended warranty just in case something major goes wrong.

Opting to buy a used car from a private party, is, in all probability, a no-brainer. It’s true that if you’re buying a late model car there will be a lien holder. Companies that finance cars deal with private sales all the time. It will probably go smoothly.

However, there are lien holders you may not even know about that have dibs on the car. Do your homework, listen closely to the seller who might tip his hand about back child support or the IRS being after him.

His off-the-cuff remarks that have nothing to do with the sale might tell you everything you need to know about the deal.

If you have any doubts about the quality of the car you are buying, you can always have a certified technician from YourMechanic give your car a pre-purchase inspection. This will allow you to skip all the worry about knowing the true condition of the car before making the final purchase.

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Colby called to notify me he was in route to the inspection--to ease my mind and to ask if there was anything in particular/extra I wanted him to check out. He was going to do a pre-purchase inspection of a 2002 Ford Ranger. He assured me that I hired the right guy since he'd worked for Ford for 13 years. An hour or so later, he called me while he was driving home to discuss his inspection. I could ask him everything I wanted as we dialogued. That was so helpful! And way more personable and real than just reading the report he emailed. The report was thorough and included a test drive. He had recommendations for some work to be immediately done; rotors & brake pads. Then, included the cost for him to do that work should I choose. The price was fair and not crazy expensive. I'm still deliberating on whether to have that done or to wait for my mechanic to do it once I have the truck. Thank you again Colby.

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