What Is a Lienholder on a Car Insurance Policy?

Last Updated on June 12, 2020

When signing up for car insurance, you’re going to see many terms on your paperwork that you may not have heard before. This jargon can make dealing with car insurance very confusing. In this article, we’ll talk about what a lienholder is and why that matters for your car insurance.

What is a lienholder?

You will see this term on your car insurance if you have taken out a car loan to pay for your vehicle. Your lienholder is the financial institution that is giving you the loan, and that can be a bank, credit union, auto dealer, or even a private party in some cases. The lien is the amount that you owe on your car, and it allows the lienholder to guarantee to the lien provider that you will pay for the vehicle. You’ll need to pay off your loan in monthly installments as agreed to in your initial documents. If you don’t make your monthly payments, your lienholder usually has the right to repossess your car.

Do I have a lienholder if I lease my car?

A common misconception that many people have is that they have a lienholder if they lease their car. However, this is not the case – the party that leases your car to you is called the lessor. They own the car entirely and are letting you rent it for a monthly fee, as opposed to paying off a loan towards eventual purchase. However, the lessor may have some similar requirements to lienholders. For example, they may require that you purchase a certain amount of car insurance above the legal requirement to protect the car, the same way lienholders do.

Liens and Car Titles

Having a lien on your car changes the way all of your paperwork is handled. Usually, your lienholder will want to keep your car title for their own security. They will also likely want their name printed on the car title. They are technically the owner of the car as long as you are paying it off, so this gives them some legal security while you still owe them money. If you refinance your car at some point, your new lienholder will likely require that you change the car title to reflect them as the lienholder. 

Liens and Car Sales

If you have a lien out on your car, you won’t be able to sell it the same way you would if you owned the car. The lienholder will usually require you to pay off your lien entirely before you can sell the car. In some cases, you may be able to transfer your lien to another party. If you are interested in selling your car, talk to your lienholder to see what your options are.

Liens and Insurance

Lienholders usually require that their name is listed on your car insurance. Many insurance providers want to have this information as well. Lienholders may also require you to purchase a more comprehensive insurance plan than is required by law. Typically, you’ll be required by law to have a certain amount of liability insurance and personal injury protection insurance. Lienholders will usually require you to go further and purchase comprehensive and collision insurance, which covers damages to their car. This provides them with the financial protection they need in the event your car is severely damaged.

Filing Insurance Claims With A Lien

When you have a lien on your car, filing insurance claims is going to be a bit different than if you owned the car outright. You will likely need to put the lienholder’s name on your claim, and their name will also most likely show up on the check that you get when your claim is approved. Once you get the money, your lienholder may have some requirements for how you spend it. Usually, they will want you to prove that you spent the money on car repairs from a reputable provider, so always save your receipts and document everything as much as possible.

Loan Gap Coverage Insurance

This is a unique type of insurance that you may want to consider investing in if you have a loan out on your car. The amount you owe on your car when you take out the loan is its value at that time. However, the value of your car is naturally going to depreciate over time. If something were to happen to your car and it was totaled, your collision or comprehensive insurance will pay for the value of the car at that time – which is usually less than you initially took out the loan for. However, even after your car is totaled, your lienholder will often still require you to pay back the rest of the loan. Loan gap coverage insurance pays for the difference between what your insurance gives you and what you owe, so you don’t have to continue to pay off a car you can’t actually drive.

How to Choose A Car Loan

Just like when shopping around for car insurance, you should also be very selective and ask plenty of questions when selecting a loan provider. Start by looking at your current credit score to get an idea of what types of loans you will qualify for. Then, shop around for the loan by comparing interest rates and monthly payment options to see what suits you best. Make sure that you read your loan’s terms in full before signing and ask questions about anything you aren’t sure of. Loan documents often use jargon to disguise less than favorable conditions, so make sure that you aren’t being taken advantage of.

Since many people don’t buy their cars outright, it is very common to have a lienholder listed on your car insurance. Make sure you talk to your lienholder to understand their car insurance requirements before purchasing your policy. Since your lienholder is still the technical owner of your car, it’s important to make sure you adhere to their requirements to avoid conflict or repossession.