When you get a car loan to buy a car, a lienholder will be listed on your car’s certificate of title and on your insurance policy until the loan is paid off. What is a lienholder, and how does it affect car insurance?
What is a lienholder?
The lienholder is typically a financial institution, such as a bank or credit union, that provides the loan or lease for your vehicle. They hold a legal claim, or lien, on the car until you’ve paid off your loan or fulfilled your lease agreement.
How does a lienholder affect your car insurance?
Lienholders will typically require you to carry certain insurance coverages. Since they are the legal owners of the car until you pay off your loan, they have a financial interest to protect the vehicle. In most cases, a lienholder will require you to carry comprehensive and collision coverage.
These coverages help pay to repair or replace your car in the event of an accident. Collision coverage applies if your car hits or is hit by another car or stationary object, while comprehensive coverage applies to damage not related to a collision. This includes damage due to things like fire, theft, vandalism or natural disasters.
| Comprehensive coverage may cover: | Collision coverage may cover: |
| Natural disasters and storms | Hitting another vehicle |
| Vandalism | Damage caused by another vehicle |
| Damage caused by animals | Hitting a stationary object |
The lien process: From loan to ownership
When you finance a car, you borrow money from a lender like a bank or other credit union and your ownership is subject to a lien. While the certificate of title will be in your name, it will also name the lienholder. Typically, the lienholder will take physical possession of the certificate of title until the loan is paid off.
During this time, make sure you’re meeting the lender’s minimum car insurance requirements. Failure to do so could be a breach of your loan agreement or lease.
When you’ve paid off your debt, the lender will release the lien and return the certificate of title to you. While you would no longer need to carry the lienholder’s minimum required coverage, it’s still a good idea to maintain collision and comprehensive coverage on your car.
How to add lienholder to your policy
When you secure financing, the lender will provide details that you will need to pass along to your insurance company. Your insurance company will then list the lienholder as a loss payee on your policy.
Why does the lienholder require insurance?
A lienholder requires insurance coverage because they have a financial interest in the vehicle until the loan is paid off. Insurance helps ensure you will have the means to pay them back if the car is damaged.
If your car is totaled in an accident, or is stolen, comprehensive and collision will first pay your lienholder the outstanding amount of the loan or lease, and anything left after the lienholder is paid, will be paid to you. This protects both you and the lender by ensuring you won’t be on the hook for the full remaining amount you owe on the loan, and the lender will recover their financial investment.
Loan/lease gap insurance
Most new cars lose value the second they’re driven off the dealer’s lot. In some cases, this can be thousands of dollars. When a car is totaled, the insurer will only pay up to the actual cash value of the car. This could be less than the amount you owe to your lienholder.
Owing money on a car on the way to the junkyard is not an enviable position to be in. You can protect your investment with optional loan/lease gap coverage. This coverage pays for the difference between what your car is worth and what you still owe on it if it is totaled. It can help free you from having to make payments on a car you can no longer drive.
Gap insurance may already be included in your lease payment, so check your lease documents for specifics. If it’s not already included, your auto insurance provider may offer it.
What happens if you don’t meet lienholder requirements?
If you fail to maintain the insurance required by the lienholder, several things could happen depending on your loan or lease contract.
The lender may implement force-placed insurance, which is an insurance policy purchased on your behalf. Force-placed insurance is typically more expensive than a normal car insurance policy, the cost of which will be added to your loan. On top of that, a forced-place insurance policy will only cover the value of the car – it won’t cover repairs, your injuries, or liability in the event of an accident. Alternatively, a lender may repossess the vehicle if you have defaulted on your obligation to maintain the required insurance.
Conclusion – What is a lienholder on car insurance?
A lienholder is a lender or lessor that has a legal claim, or lien, on your car until you pay off your loan or fulfill your lease contract. The lienholder will require you to carry certain insurance coverages, like comprehensive and collision, to protect their investment. Failure to maintain the required minimum coverage could be a breach of your loan or lease agreement.
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