Learn more about auto dealer bonds, also known as motor vehicle dealer bonds, and request a quote online today from Surety Bond Professionals.
What Are They?
Across the country, state governments have regulatory authority over the motor vehicle sales industry and are responsible for the licensing and oversight of motor vehicle dealers. Their role is essential for the protection of consumers and for maintaining an orderly motor vehicle marketplace. The specific agency overseeing the licensing and operations of motor vehicle dealers may differ from state to state, but is typically part of a state’s Department of Transportation.
Individual states have established a bonding requirement as part of the process for becoming licensed as a motor vehicle dealer. An auto dealer bond is a dealer’s pledge to conduct business in a lawful and ethical manner, in accordance with all applicable state laws, regulations, and industry standards. By requiring applicants for a dealer’s license to purchase an auto dealer bond, the state protects consumers against financial losses resulting from the unlawful or unethical conduct of motor vehicle dealers.
Who Needs Them?
Anyone applying for an auto dealer’s license may be required to purchase an auto dealer bond. Most states grant different types of auto dealer licenses, depending on the types of vehicles sold, whether those vehicles are new or used, and whether the dealer sells retail to the public or wholesale to other dealers. The required bond amount typically differs by license type as well.
How Do They Work?
A surety bond agreement is a legal contract among three parties: the obligee requiring the bond, the principal purchasing it, and the surety issuing it. In the case of an auto dealer bond:
- The obligee is the state Department of Transportation or other agency that licenses motor vehicle dealers
- The principal is the motor vehicle dealer seeking to obtain or renew a license
- The surety is the company underwriting and issuing the bond.
The terms of the bond specify how the principal must conduct business to avoid claims being filed against the bond. If the principal commits a violation that causes the state or a consumer to suffer a financial loss, the injured party has the right to file a claim and be compensated for it, up to the full penal amount of the bond.
What Happens in the Event of a Claim?
The surety will conduct an investigation of any claim to ensure that it is valid. Ideally, the principal will be willing and able to pay the claim immediately. But more often, the surety will pay the claim on behalf of the principal and then collect reimbursement from the principal.
This gives the dealer some time to come up with the necessary funds—but, ultimately, paying claims is the sole responsibility of the principal.
What Do They Cost?
The principal pays only a small percentage of the required bond amount as the annual premium for the bond. That percentage is determined by the surety based primarily on the principal’s personal credit score and financial resources. For those with good credit, that percentage is generally between 1% and 2% of the bond amount. Those with poor credit may pay a higher rate.
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