Everything You Need to Know About Texas Motor Vehicle Dealer Bonds

Published: Mar 13, 2014

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Forecasts for the future of auto sales are optimistic, and the state of Texas is no exception. In fact, for two consecutive years, Texas has been among the top states with most significant increases in their dealerships counts. It’s also ranked as one of the 5 best states to open a car dealership.

If you are thinking of opening an auto dealership business in Texas, you will find that it is strictly regulated. There’s a lot of requirements you will encounter on you way to getting licensed and the Texas motor vehicle dealer bond is one of the most important prerequisites. Read on to find out more about how to obtain a bond.

What is a Motor Vehicle Dealer Bond and Why Do I Need It?

Motor Vehicle Dealer Bonds, also known as DMV bonds or auto dealer bonds, fall under the category of license surety bonds. License surety bonds are required pre-licensing condition for a variety of businesses in the U.S.

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Texas Motor Vehicle Bonds work much like other surety bonds. They represent an agreement between three parties: an obligee (the Texas Department of Transportation), a principal (the auto dealer) and a surety (a surety bonds company). When the bond is underwritten, the surety guarantees the obligee that the principal will fulfill their part of the agreement.

In this particular case, the bond makes sure that the auto dealer will follow all laws and regulations regarding their business. These bonds also serve as protection for customers, so they don’t fall victim to fraud. In case the dealer breaches the agreement, the surety must compensate the state or the customer, depending on whom the breach concerns.

Texas requires all auto dealers, with the exception of franchised ones, to obtain a motor vehicle dealer bond.

How Can I Obtain a Texas Motor Vehicle Dealer Bond?

Auto dealer bonds are underwritten by a surety bond company after a thorough evaluation of your business. You will need to submit company information such as size, location and financial statements, as well as go through a background check.

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Your personal credit score will also be evaluated, and that’s the most important part of the process since that’s the basis for your premiums. The final goal is for the surety to be able to assess your likelihood of triggering a claim. This is important, because sureties always assume a 0% loss ratio when underwriting bonds, so the higher the credit score, the better.

What’s the Cost of a Texas Motor Vehicle Dealer Bond?

The state of Texas has fixed the price of auto dealer bonds at $25,000 for all dealers. This, however, does not mean that this is the price you pay for it. Typically, the bond is paid in annual premiums,In Texas, however, the bond is valid for two years, so you pay two annual premiums every other year.

Your premium will be estimated after you submit all of the above mentioned information to the surety. If you have a clean credit history and a good personal credit score, the premiums will be in the range of 1% to 3% of the total $25,000.

What If I Have a Bad Credit Score?

Because of the 0% loss policy, people with bad credit scores are considered high-risk applicants. So, if you have a credit score of 650 or lower, your premiums will be 4% to 15% of the bond amount.

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Sometimes, though not often, the surety may require that you to post collateral as an extra precaution. Other conditions which might affect your premium price in a negative way include civil judgments, tax liens and past bankruptcies.

If, however, you have an ongoing bankruptcy or late child support payments, you won’t be able to get a bond, in compliance with national regulation.

These are the main things you need to know before you apply for a Texas motor vehicle dealer bond. Start your application process today and get your quote in just minutes! Don’t hesitate to contact us if you need further assistance.

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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.