If a vehicle title has a lien listed on it, a bank has legal financial interest in the vehicle, meaning that there is an active loan on the vehicle that has not been satisfied. If a lien exists, a bank's name and address will be listed under the "lien holder" section on the front of the title.
Transfer of Ownership
Many states do not allow title transfers if a lien is listed on the title. Even if you pay the seller for the car, you can find yourself being turned down for a new title. Check with your state's motor vehicle department to find out if title transfers are allowed when a lien is documented on the title; more often than not, the vehicle cannot be transferred without a lien release.
If the seller pays off his original vehicle loan, he is provided with an official lien release, which is a bank letter that states that the loan has been satisfied along with all owner and vehicle information. It also states that the bank no longer has financial interest in the car. The note is signed by a bank representative in ink. You should have a lien release handy to transfer ownership. Even if your state allows title transfer with a lien, the lien holder will be listed on your new title, which can present issues if trying to sell the car in the future. Some people will not purchase a vehicle when a lien exists on the title.
Repossession
If you do manage to transfer the title to your name with the lien holder listed, you can face vehicle repossession despite having already paid for the car. Because the vehicle is not owned entirely by the seller, the bank can take it back if the seller fails to pay the loan.
If the seller stops making payments or does not complete the total loan payoff, the bank can easily track the vehicle and locate you as the registered owner. In this case, the bank will hire a repossession company to take the car back. A repossession can happen anywhere; while the vehicle is in your driveway or even a parking lot while you are shopping or at work.
Precautions
Do not buy a car that has a lien release listed on the title. Ask the seller for the official lien release statement, and do not accept a copy. You need the official document should any problems arise. If you are buying a car that has a loan on it, but the seller is going to pay off the loan with your purchase price, work directly with the lender to submit payment so that you receive the lien release. This also helps to ensure that your payment is going to the vehicle's payoff amount. While you can transfer the title with a lien in some states, the risks are not worth it.
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