Dealer Surety Bond: What They Are and Their Importance
If you’re looking to open a car dealership, then it’s imperative to know what a dealer bond is.
[Check out our dedicated auto dealer bond page which is a great informational resource]
They are a kind of surety bond that most auto dealerships must obtain from the Department of Motor Vehicles in their specific state to operate. Obtaining a bond is a necessary part of the dealer licensing application process. In fact, before one receives a dealer license, one needs to have an auto dealer surety bond — except in the states of Delaware, Ohio, and Vermont.
These bonds ensure that customers, as well as the state the auto dealer operates in, are protected from fraud. A dealer surety bond also guarantees that the auto dealer will adhere to state laws and rules as well as industry regulations. For an auto dealership, a bond is a way to show that the business is professional, trustworthy, and credible—both to relevant state agencies and to customers. Philadelphia Surety company and CNA Surety are a few of the top-rated auto bond carriers that we use.
We are NFP Surety, the industry leader in auto bonds. In fact, we write all kinds of bonds, nationwide. If we need a surety, call us today at (800) 863-3210 or visit our website at nfpsurety.com. Call the surety bond auto dealer pros today!
How Does a Dealer Surety Bond Work
They can also be called many different names, depending on the type as well as what state the surety is obtained: motor vehicle, auto seller, automobile, wholesale car dealer, used car dealer bond, motorcycle seller, DMV, etc.
Whatever the name of the bond, there is a typical way in which they work. These bonds are designed to protect not only customers, but also financial institutions, government agencies, and sellers from unethical business dealings and fraud. If a party has been frauded by a car dealership, then to receive compensation, they can make a claim against the bond.
One thing to remember is that a seller bond may seem like it’s a type of insurance policy, but it is not insurance. It’s a legally binding contract that ensures that the car dealership will not defraud a client, while a third party, the bonding company, oversees this business relationship.
So remember that bonds protect customers and other parties that a car dealer will do business with—not the car dealer. If there is a legitimate claim that is made against the dealer surety, then the bond may need to pay the claim, and then the car dealer will need to pay back the bond. The age of the business does not matter—whether it just started or has been in business for many years.
What Kinds of Claims Can Be Filed?
Typically, the kinds of claims filed for a dealer surety involve dealerships with sell use cars. Issues such as the sale of a stolen car, warranty issues including failing to honor a written warranty or paying for a purchased warranty, financing fraud, or odometer tampering are a few reasons why a customer would file a claim against the dealer surety. Learn how to become a car dealer.
How Much Do They Cost? Three Factors
There are three factors that will affect how much a auto seller bond will cost.
The first factor is the amount of your total bond affects costs, meaning that it’s proportional. So the larger the total amount is, the larger the portion you will be required to pay. The reason for this is the surety company is liable for larger claims which have larger bond amounts. This results in the need to charge a higher rate.
The next factor is your credit history. The following is a typical breakdown for percentages based on your personal credit score.
Good credit scores (700+) will usually pay 1 to 2 percent of the total amount. Credit scores that are below 700 will pay between 5 and 10 percent of the total amount.
The third factor for cost is the history of losses. Depending on the state you’re in, or the specific surety you buy, some have posted more losses than others. Different types of bonds have different costs.
So, for example, if a bond you purchase has had very few losses, the surety company will give what is called an instant issue of the bond, because they have confidence in the bond’s performance. But, if a bond continues to post large losses, then the surety must charge a higher premium as a way to absorb those losses.
The price only needs to be paid one time until it is renewed. It is not like an insurance policy, where you need to pay for the premium on a monthly basis. Tokio Marine HCC is also another bonding company we use, and is another phenomenal resource on the subject.
Used Car Dealer Bond
It’s important to know how much a bond will cost ahead of time, because based on these three factors, it can be quite costly. Remember that in 47 states, you must have one before you are able to receive your distribution license. Not having this bond can delay the opening of your car dealership. We are the bonding professionals. Contact us today for a used car dealer bond quote!