If you go to buy a car but don’t have the cash to pay for it outright, your likely alternative is financing. If you are new to financing, you may be wondering, “What is a lienholder?” 

A lienholder is a technical term for a simple concept. When you take out an auto loan, a lienholder is a company or party that owns and is financing your loan. Typically, this is a bank, financial institution, or car dealership.

A lienholder has a legal stake in your vehicle until you pay it off. Until you pay off the loan in full, the lienholder is listed on the title and the insurance policy. If you stop making loan payments, the lienholder can take possession of the car. Additionally, it can dictate which type of car insurance you hold for the car.

Your lienholder can also change if another party buys your loan. If you lease a car, you won’t have to deal with a lienholder; in that instance, it’s called a lessor.

What insurance does My lienholder require?

The type of insurance your lienholder requires depends on the specific company or institution in charge of your loan. Because it maintains a claim to the vehicle, a lienholder has the right to determine the type of car insurance you maintain on your vehicle. Therefore, it can dictate the level of risk you need to be insured for in case you have an accident. 

To drive a car, unless you live in New Hampshire or Virginia. However, a lienholder may require more than the minimum amount of insurance. It may ask you to include coverage for natural disasters or break-ins, as well as for any accidents that occur. These are called comprehensive and collision insurance.

Comprehensive and collision coverage

Comprehensive car insurance provides coverage for any damage that occurs while you’re not occupying the vehicle; such as a fallen tree, fire, or a break-in. Collision coverage on the other hand provides insurance for your car in the event of an accident. This includes an accident with an inanimate object, like a tree or a guardrail, or another vehicle. It provides coverage regardless of who caused the accident. 

How to file a claim when you have a lienholder

Filing a claim through your insurance company is a bit more complicated when you have a lienholder. First, you’ll file a claim the standard way with your insurance company—either online or over the phone. You’ll submit proof to the insurance company of the accident or issue.

Once the insurance company approves your claim, you’ll receive a check from the insurance company made out to you and the lienholder. From there, you need approval from the lienholder before you can cash the check. 

This step is where things can get complicated. The lienholder may require proof before it will sign the check, like photos, receipts, or other documentation. If you need the funds to repair your car right away, having a lienholder can slow down the process. 

Make your life easier by holding onto any evidence of repairs. You might need to prove to the lienholder that you used the funds toward the restoration of the car. This is one requirement that some lienholders have that provides another layer of protection on the lienholder’s investment.

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About the Authors

Tiffany Verbeck is a personal finance writer for Reviews.com. Over the last year, she's covered credit cards, home security, and more at The Financial Diet, The Simple Dollar, and Interest.com.