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Types of Surety Bonds Needed for the Automobile Industry

Thursday, August 3, 2023

Almost every aspect of daily life for many Americans depends on their cars. Therefore, the vehicles transporting parents to work and children to school must be sold and serviced by qualified, trustworthy businesspeople.

Many businesses that deal with the sale and service of automobiles frequently need surety bonds. These bonds maintain business accountability while helping to safeguard the consumer and the driver. Before they can receive a license from state or municipal authorities, businesses, including new and used motor vehicle dealers, brokers, wholesalers, and auto parts dealers, may need to buy any of the several forms of surety bonds.

What principal kinds of surety bonds should businesses in the automobile industry be familiar with?

How Surety Bonds Protect Auto Industry Customers

Regarding surety bonds for the auto industry, the bond financially protects the company’s clients, creditors, and the state government against dishonest or illegal business practices.

The state government typically demands a surety bond from a car business. Following the bond purchase, the company must submit the bond documentation with its application for state licensing. A claim for financial restitution can then be made to the surety if a client or the government suspects that the company has breached the law or behaved unethically.

What is an Auto Dealer Surety Bond?

It offers an avenue for remedy should an auto dealer break licensing laws, rules, or regulations. It is also known as a dealership or car dealer surety bond. Most states need motor vehicle dealers to get a surety bond, often known as a motor vehicle dealer bond.

Let’s examine the three parties engaged in these surety bonds to understand how they function:

  • The person, organization, or entity that needs the bond is known as the obligee. The auto dealer bond is typically required by the state where you intend to open your vehicle dealership to protect its residents.
  • The party that needs surety bond protection is the principal. In this instance, you are the car salesperson.
  • The surety underwrites the auto dealer bond.

Together, these three parties make sure that auto dealerships conduct business morally and lawfully, giving the general public peace of mind.

How Does a Car Dealer Surety Bond Work?

It accomplishes this by establishing a procedure for a claimant to seek monetary compensation if you fail to uphold her obligations.

The following parties may claim an auto dealer bond:

  • Customers who buy products from the dealership
  • Vendors that the dealer buys inventory automobiles from
  • The lenders who finance the dealer
  • Creditors who provide inventory financing to dealers
  • State agencies that oversee the dealer’s license

The following are typical reasons for claims against auto dealer bonds:

  • Misrepresentations made about a car’s state when it’s being sold
  • Failure to deliver a genuine car title at the time of sale
  • Without paying state sales tax on purchased automobiles
  • Selling a stolen car
  • Not disclosing a vehicle sale

The dealer is where claims are made against an auto dealer bond. The consumer or creditor first contacts the dealer to voice their complaint. After thoroughly investigating the complaint, the dealer should try to find a solution. The surety follows up by looking into the complaint and contacting the claimant and the dealer.

Other Important Surety Bonds in the Automotive Industry

A motor vehicle dealer bond is the most typical kind of surety bond used in the automobile industry, but there are many more, such as:

Surety Bond for Automotive Dismantlers or Parts Recyclers

These surety bonds are important because auto repair companies routinely deal with potentially dangerous materials that can damage the environment if improperly disposed of. Additionally, these companies may have access to materials like license plates from vehicles and other items that could be utilized for criminal activities. Therefore, These companies must post an auto salvage surety bond before applying for a business license.

Certificate of Title Surety Bonds (also known as Bonded Title)

Bonded titles, which take the place of a regular vehicle title for a predetermined length of time (often 3-5 years) to ensure that no other claims to the title of the vehicle can be made, may be encountered by dealers purchasing or accepting a trade-in for a used car. The bond should be kept on file by the owner and include the VIN, expiration date, and is typically filed with the DMV.

Title Company Surety Bond

Title businesses take on a lot of legal responsibility. They are expected to act responsibly because they help other organizations, like auto dealerships and customers, with the paperwork needed for a title transfer.

Motor or Automobile Club Surety Bond

Some jurisdictions demand surety bonds for motor or automobile clubs, membership organizations that provide services to visitors, and car owners. Automobile club surety bonds ensure that these companies act morally and in accordance with the law.

Driving School Surety Bond

To protect consumers if the driving school engages in unethical behavior, driving schools, particularly those that provide instruction for commercial driver’s licenses, are required to secure surety bonds. In some cases, these bonds also ensure that students will receive their tuition back if the driving school closes before they can finish their classes.

Types of Auto Dealer Bonds

You can be required to submit one of some dealership surety bond types, depending on the kinds of vehicles you want to sell, including:

These auto dealer bonds all function in much the same ways. The victim of a dealer’s fraud or unethical business practices may file a claim and obtain reimbursement from the surety company.

Who Needs an Auto Dealer Surety Bond?

Generally speaking, an auto dealer bond is necessary to obtain a license for anyone who intends to sell cars or other motorized vehicles as their business or as a significant source of revenue. An auto dealer license cannot be obtained without the bond, and the license will be revoked if the bond coverage lapses. Operating without a license may result in severe consequences, including the loss of support permanently. Therefore, anyone needing an auto dealer bond should do it right away.

Step-by-Step Instructions for Obtaining an Auto Dealer Bond

Establish what you needAlthough not all states do, most require car dealer bonds to operate a business. If you’re starting, select your state from the map below to see what documents you need.

  • Once you have established the bond your dealership requires, the next step is to submit an online application for your bond.
  • Publish your DMV bond by signing it and sending it to the DMV.
  • You must sign your bond.
  • Create a copy of your files as a backup.
  • Send the signed bond to the state and any other necessary documentation the state or the bond agency provides.

Depending on your state, this process can take one to three weeks after the state receives your bond and contacts you to provide your license.

Why is this bond required of me?

The surety bond safeguards your customers if your dealership commits fraud or unethical business practices. These could consist of, but are not restricted to, the following:

  • Failure to transfer a title properly
  • Giving false information about the state of the vehicle
  • The odometer being tampered with
  • Breaking pledges made either verbally or in writing
  • Financially deceptive practices, such as “yo-yo” financing
  • Not paying state sales tax or other expenses
  • Covering up sales
  • Violation of the terms and conditions of the license

How Much Does an Auto Dealer Bond Cost?

There is no set cost for a surety bond because several factors affect how much the premium for a car dealer bond will cost. The principal’s credentials determine the car dealer bond rates, as they do for most surety bond kinds. State-specific bond requirements vary, and factors affecting the premium include your credit score, bonding history, and the type of business you run.

The surety evaluates the possibility of a claim. A portion of the auto dealer bond sum is accordingly levied to you. These bonds typically cost between 1% and 5% of the needed amount across the country, though prices occasionally fall outside that range. Your credit standing influences the bond’s price; thus, typically, the greater your credit, the better the bid.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.