Massachusetts Used Car Dealers: What You Need To Know to Get Bonded

Published: Feb 13, 2014

Applying for a used car dealer license in Massachusetts can be a lengthy process since it involves many steps. Among the most confusing one of them is a requirement called a used car dealer bond. Read on to gain a better understanding of what it is, what it does, and how to get one.

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Definition of Used Car Auto Dealer Bonds

All 50 states require auto dealerships to post an auto dealer bond as part of the licensing process. For Massachusetts the requirement only extends to used car dealers, particularly those applying for a Class II license.

Auto dealer bonds are a type of commercial surety bonds, a concept which many people mistake for insurance. While purchasing insurance protects your business, auto dealer bonds are there to protect your customers. They represent an agreement between three parties: an obligee (the auto dealer), a principal (the customers) and a surety bonds company, also known as a surety. The surety underwrites the bond and thus guarantees that the car dealer will operate in accordance with state laws and be fair to their customers.

If a car dealer is found to be in violation of the agreement, a claim can be filed against them. The dealer and the surety will be jointly responsible for compensating the client (or the state) for the losses incurred. To minimize the likelihood of a claim, make sure you read Massachusetts’ Lemon Law about used cars.

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Pricing of Auto Dealer Bonds

Massachusetts requires all dealers with a Class II license to post an auto dealer bond to the amount of $25,000. The price dealerships pay, however, is only a percentage of that amount, paid in annual premiums. When you apply for a used car dealer bond, the surety will ask you to provide certain information about your business and use that information to calculate your premium.

Effects of Good/Bad Credit Standing

The most important part of the evaluation process is your personal credit score. Applying for dealer bonds is much like applying for a bank loan – your credit score is seen as a measure of your trustworthiness. And because sureties always assume a 0% loss ratio they, naturally, give better quotes to people with better credit history.

If your credit history is clean, expect quotes in the range of 1% – 5% of the bond amount. If, however, you have credit issues you will be considered a high-risk applicant and will typically need to pay premiums of about 5% – 15% of the dealer bond amount. Some cases, though not many, will require premiums of 20% and/or posting a collateral. But don’t worry, if you work hard to improve your credit score and you present strong financial statements, your premiums will gradually decrease.

High-risk and Barred Applicants

Typically, high-risk applicants are people with a credit score of 650 or below or those with civil judgments, tax liens or closed bankruptcies. Currently, applicants with open bankruptcies or late child support payments are the only group that cannot obtain a used car dealer bond.

So now that you know all this, how do you obtain the bond? Surety bond agencies such as Lance Surety Bonds provide online applications that make the process a whole lot easier. They do all the shopping for you and increase your chances of getting bonded at the best possible premium. Apply now and get your quote for free!

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Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.