Some car owners sell their vehicles privately while they still owe money on the loan. However, any car that is sold while money is owed will have a title that lists the lender as a lienholder. The loan will have to be paid off in full before the title can be transferred to the buyer.
A lien on the certificate of title gives the lender a security interest in the vehicle that prevents the car from being sold before the total loan balance -- including principal, interest and applicable fees -- has been satisfied. The lender notifies the DMV in the state where the car is registered of the lien as an added measure of security. If the seller is not going to pay off the loan before selling the car, the buyer can take steps to satisfy the lien, buy the car, and take possession of the title.
If the loan was originated by a large bank or a local credit union, consider going to the nearest office to make the purchase. By doing so, you can take part of the money being used to purchase the car to pay off the lien, and give the rest to the seller. With the loan satisfied, the lender can release the lien and provide the documentation to transfer the title.
If the lender does not have an office in the area, you can take the same approach by mailing or wiring the amount necessary to pay off the loan to the lien holder, and paying the balance to the seller. Depending on state laws, the lender will send the release of the lien and the title to you or the seller. If the paperwork is going to be sent back to the seller, the extra step of having to collect it adds a degree of risk for the buyer.
To mitigate the risks, you can run the transaction through an escrow service. This puts a third party between the buyer and the seller, which coordinates the payoff of the loan by the buyer, payment to the seller, and the transfer of title. Using an escrow service will add to the cost of the transaction, but provide greater assurance that both the buyer and the seller will receive what they are promised.
