State governments require dealerships to obtain auto dealer bonds to comply with consumer protection laws. An auto dealer bond is a type of surety bond also known as a third-party performance guarantee. There are three parties to a surety bond:
- The Principal is the dealership required to fulfill their obligations as required by state and federal regulations in operating a dealership. The terms auto, car, and motor vehicle are used interchangeably to avoid confusion.
- The Obligee is the party to which the Principal or dealership is contractually obligated to perform their duties for, for instance, a state licensing authority and the consumer public.
- The Surety, or the insurance company providing the third party guarantee, backs the Principal.
The surety bond ensures the operator’s good faith in ethical business standards, contractual obligations, and remedy of any damages caused by its failure to abide by agreed-upon terms. Often a requirement for licensing, motor vehicle dealer bonds are paid for in full by auto dealers before they can be approved to operate. Surety bonds act as third party guarantees from the surety company ensuring the dealer will make good on its promises.
Who is considered a motor vehicle dealer?
In most states, dealers need licenses and bonds for their business. The definitions for motor car dealers vary widely across different states. Still, the general rule is that people buying or selling two to six vehicles each year must obtain the license.
Who regulates auto dealers?
Typically, the DMV regulates automobile dealers according to state licensing legislation. The government enforces the laws by implementing licensing requirements, including dealer education programs and performance security in the form of bonds. This guarantees compensation to customers when dealers don’t comply with the law.
Types of Auto Dealer Bonds
There are many kinds of automotive bonds available depending upon where you wish to conduct your business and what type of vehicles you want to sell. Typically, they are:
- Auto dealer bond
- Auto auction license bond
- Auto finance business license bond
- Auto manufacturer’s representative bond
- Auto parts and accessories dealer bond
This guide focuses on the following types of car bonds:
- Motor Vehicle Dealer Bonds – for dealers selling cars, trucks, motorcycles, and mobile home dealers;
- Recreational Dealer Bonds – for selling boats, RVs, and other non-motorized types of vehicles.
What does an Auto Dealer Bond Guarantee?
The primary purpose of any auto dealer bond is to provide accountability for the dealer, by the surety bonding company that issues it, to perform their professional duties. These kinds of bonds are typically required to be procured before a dealership can be granted the right to engage in the business of selling motorized vehicles, such as boats, RVs, trailers, and other types of non-automotive vehicles. An auto dealer bond is used by car dealerships dealing with both cars and non-motorized vehicles.
Auto Dealer bonds are often required when a dealership purchases or refinances a motor vehicle contract. The bond guarantees that should the dealer be in default of their obligations as a dealer, the consumer or party bringing a valid claim against the bond forward will be compensated for their loss and damages by the surety company that issues the bond.
Specific duties of a Motor Vehicle Dealer Bond include:
- Establishing a contractual relationship between the dealer and the car dealer surety bond issuer or motor vehicle dealer surety company.
- Guarantee that all transactions will be made in good faith, as specified by each dealership’s contract with its clientele or customers.
- Making up for any losses or expenses incurred by a clientele because of the dealership’s actions violate their bonded obligations.
How does a Motor Vehicle Dealer Bond Work?
Surety bonds are a guarantee between the dealer and the Obligee (the DMV) provided by a third-party guarantor (the surety bond provider). This assurance acts as a kind of credit that reimburses clients in the case of any allegation that results in a valid claim against your business’s fraudulent or unethical behavior.
A licensed motor vehicle dealer surety that issues the bond collects an annual upfront premium as compensation for taking on the risk, typically between 1-3% of the total bonded exposure as outlined by licensing requirements or governmental agency requirements.
Different states have different laws regarding dealer bonds. Some require you to have a higher bond amount than others, while some are more lenient with the bonds themselves, including the time it takes for them to go into effect. It is advised that dealerships check specific requirements, for instance, with the DMV to determine their exact bond amount.
After obtaining your bond, it can take up to 30 days to go into effect. The dealer will also have to wait an additional 30 days to request a bond increase.
Once the bond is active, your dealership will remain covered for up to 3 years before you are required to renew it or pay off an annual fee associated with it. Simpli Surety will notify you when your motor vehicle dealer bond or new car dealer bond renewal is coming up!
What Does an Auto Dealer Surety Bond Cover?
Manufacturers, distributors, and agents of new motor vehicles have different requirements than auto dealers. Dealer bonds cover a wide range of fraudulent, negligent, and unethical conduct. These vary with each state’s regulations, and the DMV is in charge of prescribing a number of the criteria. The following are some examples (but are not limited to) of the many factors that must be met:
- Title error
- Deceiving Customers About the Car’s Condition
- Mileage tampering
- Verbal and written warranties aren’t being acknowledged.
- Using fraudulent financing methods
- Failure to pay sales tax or other fees may result in an expired license.
- Failure to correctly record sales
- Failure to comply with licensing restrictions
Anyone who produces, distributes, or acts as an agent for motor vehicles must post a bond with the DMV. Anyone who isn’t a licensed manufacturer, distributor, or agent but works as part of one must acquire automobile dealer bonds. Anyone wishing to fulfill one of the roles described above will be required to provide a surety bond.
Certain auto dealer bonds are not intended to cover issues related to the actual sale of the vehicle. Instead, they ensure that manufacturers, distributors, or agents act by all applicable dealership laws.
What are the Auto Dealer Bond Requirements?
Motor Vehicle Dealerships bond requirements vary from state to state. Most states require dealership bonds for a motor vehicle business owner to lawfully sell vehicles on the dealer’s lot.
Some states do not use or accept surety bonds at all, and they require that each dealership post their cash escrow deposit in an amount set by that state’s DMV.
Other states do not require a cash deposit, but they may allow for cash or a surety bond.
In some cases, the bond must remain in effect for a set period, after which it is considered fulfilled and does not need to be renewed. In other cases, the bond may need to be renewed annually or before any new activity that requires a dealership license takes place.
Most states require that the dealer license bond be renewed each time any changes are made to the dealership, even if those changes are minor.
Auto Dealer Bond Requirements by State
The requirements for the bond will vary depending on which state you are in. The minimum liability coverage required can be anywhere from $25,000 to $350,000.
For example, California’s auto dealer bond requirement is between $35,000 and $100,00 due to its expensive car market. Similarly, New York requires a bond of at least $50,000. The application process for getting a bond is different in each state, so you’ll want to contact the Department of Motor Vehicles for more information on how to get bonded.
Who is considered a motor vehicle dealer?
In most states, dealers need licenses and bonds for their business. The definitions for car dealers vary widely across different states. Still, the general rule is that people buying or selling two to six vehicles per year must obtain the license. Many states do not allow for these rules in general, such as requiring used car dealers surety bonds to be purchased, and may require different bonds depending upon the dealer license classes (used, retail, etc.)
Getting Your Car Dealer Bond
What Information is Needed for an Auto Dealer Bond Application?
Underwriters for surety companies will collect and evaluate at least the following data to determine eligibility and pricing for an auto dealer bond:
- Registered Dealership Legal Trade Name and DBA if applicable
- Address and Phone Number
- Years in Operation
- Owner(s) Contact Info and SSN
Some surety firms will examine a firm’s financial documents for more significant bond amounts (usually over $50,000). Underwriters will be looking for companies with enough working capital (current assets minus current liabilities) and a track record of profitability.
Online Car Dealer Bond Application
Simpli Surety helps you find an automobile dealers bond quickly. Search by auto surety bond type and pick the state your bond is required in. Fill out our online surety bond application, and if it is instantly available, you’ll be bonded in minutes. Otherwise, our underwriters will be back to you with further steps in no time.
Not seeing your bond, put in a request with our team to add it immediately.
How much does an Auto Dealer Bond Cost?
The auto dealer bond cost is typically 1-3% for auto dealers between $500,000-$1M in liability. For auto dealers with less than $500,000 in auto dealer bonds, the auto dealer bond cost is usually 4%.
How long does it take to get an Auto Dealer Bond?
It can take anywhere from 1 day up to 45 days, depending on which state you are in and how busy the Department of Motor Vehicles is. At Simpli Surety, we pride ourselves on being the fastest bond issuers in the business at an affordable price. You can be bonded as quickly as the same business day.
Is a credit check required to purchase a dealer bond?
Yes, insurance underwriters examine your business and personal credit to determine if they’re eligible to receive a car dealership bond. Usually, the carrier has a “soft check,” so the credit check does not affect the personal credit score. Credit scores and the associated data remain the primary underwriting method on auto dealers’ bonds.
Getting a Dealer Bond with Bad Credit
If you are unsure if you are a good credit person, a good credit bond may still be available. What are the reasons for this? Credit card debt is one of the most important considerations when determining the value of a bond. It helps to assess the likelihood of triggering bond claims. The auto dealer surety bond cost is generally higher as a score goes lower.
What happens if there is a bond claim?
If you violate state laws and regulations, the Obligee may have the right to claim against your motor vehicle bond. Creditors, vendors, or customers may also have the right to file a claim.
If the state requires your auto dealer bond, then that means that the DMV will have access to it if there is a problem with your business. The DMV can cancel your license, and you would be unable to sell vehicles again until you pay off any fines you owe, and your auto dealer bond is reissued.
If a vendor or customer sues you, they may file a claim against your auto dealer bond, which will then be reviewed by the surety company that issued it. If the judge rules in their favor, they will collect this damages from your auto dealer bond. Avoiding claims can be done by maintaining an auto dealer bond with the surety company.
What Happens if my Dealer Bond is Canceled?
If your auto dealer bond is canceled, you will lose your license, need to pay any damages to your customers and vendors, and may be required to turn over all of the vehicles on your lot. If you cannot pay your auto dealer bond, you will need to wait until it is reissued, which may take a few months to a year. Be sure to renew your bond to avoid cancellation.
Wrapping Up Car Dealer Bonds
An auto dealer bond is a type of surety bond that protects auto dealers from risks such as violating state laws and regulations, creditors or customers filing claims, and the DMV canceling their license. The best way to get an auto dealer bond is through an online bond provider, and at Simpli Surety, we can have you bonded as quickly as the same business day. Our experienced underwriters will get your car dealer bond to you in minutes if you qualify.
