When you buy a car and use a car loan to pay for the purchase, the lender becomes a lien holder on the title and, in most cases, the bank that made the loan keeps the title until the car loan is paid off. When you pay off the loan, the bank will send you the title, but the lien holder could still be listed on the paperwork. Each state has its own rules concerning car titles.
Generally speaking, you should be able to go to your nearest DMV in order to fill out the necessary paperwork to ensure that the title department knows you have satisfied the conditions of your loan or lien.
When in Doubt, Go to the DMV
Each state has rules that determine what a lender must do with a car title after the loan is paid off. In most cases, the title should be sent to the car owner within a certain period after the final payment was received. When you get the title from the bank, look it over closely and read any paperwork that came with the title. In some cases you'll receive a free-and-clear title; in others, you'll need to go to the local Department of Motor Vehicles office to have the lien holder removed. If you aren't sure, a trip to the DMV for some answers can prevent problems in the future.
What The Title Shows
In states where paper titles are processed manually, when you pay off the car, the lender will send out the original title. This title will list the lien holder, but will also be stamped by the lender that the loan has been paid off, the lien was satisfied and/or the debt was perfected. The title with the stamp shows that the lender no longer has a claim on the car. To obtain a title that just lists you as the owner, go into the DMV and apply for a replacement title. In some states you're required to apply for a new title after you receive the lien satisfied marked title.
Receiving a Free and Clear Title
Many states have changed their auto title handling to electronic systems, which may change how your paid-off car title is handled. With an electronic system, the lender can notify the state DMV title department by electronic means that you have satisfied the lien on the car. The DMV then issues a new title in your name without the lender and sends you the new title. With this type of system, you don't need to do anything to change the title you receive after paying off the loan.
Keep Your Records Up-to-Date
One problem that can significantly slow your receipt of the car title can occur if it is mailed to the wrong address. If you have moved since you bought the car, contact the lender several months before the last car payment is due and update your address. Then when you send in the final payment, call the lender and confirm that the title will be sent to your current mailing address.
- Virginia DMV: Liens on a Title
- Wisconsin DMV: Removing the Lien From a Title
- Nebraska DMV: Lien Notations
- CA.gov: Electronic Lien and Title Program
- Consumer Financial Protection Bureau. "What is owner's title insurance?" Accessed August 1, 2020.
- Old Republic Title. “What Is Title Insurance and How Does It Work?” Accessed May 22, 2020.
- Zillow. "What Is Title Insurance and Do I Need It?" Accessed August 1, 2020.
- GovInfo. "Public Law 93-533-Dec. 22, 1974," Page 1728. Accessed August 1, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.