What Is a Lienholder on a Car?

By Travelers

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A lienholder on a car is a loan lender that has a legal claim to your financed car. Because the lienholder is funding the loan, they have a legal interest in the vehicle until the loan has been fully repaid. A private individual, a bank or some other financial institution could be a lienholder.

Financing a car comes with a number of considerations regarding insurance. In fact, the type of insurance you need on your vehicle may depend on the requirements set by the lienholder on your car.

A lien on a car

Here’s how a lien typically works: When you borrow money to purchase a vehicle, the vehicle can be used as collateral to secure the loan. A lien protects the lender.

Liens and car titles

The title to your car is a legal document of ownership, which the lienholder typically holds for the duration of the loan payment period. In some states, the lienholder’s name is printed on the title to protect their financial interests. When the loan is paid, typically, the lienholder releases the lien and signs the title over to you.

Lienholders and car insurance coverage

If you finance your vehicle, you will typically need to have certain coverages included in your car insurance policy. Lienholders may include a clause in the contract that stipulates the type of insurance you need to carry on the vehicle. Comprehensive coverage and collision coverage are the two most likely types of insurance your lienholder may require.

You may want to consider loan/lease gap insurance to cover the difference between the actual cash value of your vehicle and the unpaid balance on your loan or lease if your vehicle is totaled due to a loss covered by your comprehensive or collision coverage.

How to add or remove a lienholder from your car insurance

You should always notify your insurance agent of any changes to your vehicle, including the addition or removal of a lienholder. To add or remove a lienholder from your car insurance policy:

• Contact your insurance agent to provide the contact information for your lienholder. Be sure to have your loan account number on hand when you make the call.
• If you are adding the lienholder, find out what, if any, coverage your lienholder requires and communicate that information to the insurance company.
• If you are removing the lienholder, review your policy with your insurance agent to be sure you have the appropriate coverage.
• Ask your insurance company to send your policy information to the lienholder to be sure coverage is sufficient. You’ll want to contact the lienholder one last time to be sure all requirements are in place to their satisfaction.

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