Used Car Dealer Bonds

In many US states, obtaining a used car dealer bond is an essential licensing requirement for those who wish to obtain a used auto dealer license. When you apply for your license, your local state licensing authority will let you know whether you need a car bond, and if so, the type and value required.

The purpose of these bonds, as with any other surety bond, is to protect potential clients and the state from any potentially fraudulent activities which dealers might commit. This makes surety bonds useful forms of protection and signifiers of reliability.

In general terms, car bonds work in the same way that other surety bond types work.
They represent contractual agreements between three parties.

The first party is known as the principal, which is, in this case, the dealership. The second party is known as the obligee. The obligee is the state authority that grants licenses and requires bonds, and in this case is usually the Department of Motor Vehicles (DMV). The third party is known as the surety, which acts as the underwriter and guarantor of the surety bond and is usually a formal surety company or surety agency. These are sometimes also known as bonding companies.

The principal must obtain a bond of the type and value determined by the obligee. In order to do this, they will pay a portion of the full bond value, known as the bond premium, to a surety company. In exchange for payment of the premium, the surety company will guarantee that cash to the value of the bond, known as the penal sum, is available in the event of a claim being made against the principal.

In the event of such a claim being made and being found valid, the surety will use that cash to pay damages to any affected parties up to the value of the penal sum. In doing so, the surety acts as an immediate form of indemnity to provide financial protection to the dealership’s clients. It’s important to note however that surety bonds are technically different from insurance. If you are interested, we have a page which more closely examines the differences between surety bonds and insurance.

In many states, a used auto dealer surety bond is required of individuals that would like to sell used motor vehicles, and who are applying for a used car dealer business license.

Some states require the posting of specifically written used car dealer bonds, and in others, a general motor vehicle dealer surety bond is sufficient.

Given the variations between states, it is sensible to contact your local licensing body to establish the exact requirements for your dealership license.

Different state laws categorize motor vehicle dealerships in different ways, and the bond types and bond values required of dealers also vary across the country.

As such, it’s difficult to lay out a comprehensive explanation of what types of motor vehicle dealerships exist, and which bonds they require. However, some common types of dealerships and their frequently associated bond types are:

Franchise Dealerships: These are dealerships which prioritize the sale of new cars through a franchise agreement with a specific manufacturer, though they can occasionally be found to sell used vehicles as well. In Texas, these dealerships do not require auto dealer bonds at all.

Independent Used Vehicle Dealerships: These are independently run businesses which sell a variety of used cars, made by a variety of brands. In most states, these types of dealerships must take out some type of auto dealer bond, though the value of those bonds can vary.

Salvage Dealerships: These are dealerships which primarily sell the parts of defunct vehicles. These types of dealers are usually required to post specific automotive dismantler bonds.

Your Auto Dealer Bond cost can vary depending on a variety of factors, including the value of the bond you are required to post, which is known as the bond amount, and your credit history.

The value of the bond you are required to post is first determined by the state depending on the type of license you wish to obtain. A bonding company will then evaluate your credit history and use their findings to determine the rate that they will charge you. This rate is known as the surety bond cost, bond price, or bond premium, and is a percentage of the overall bond value.

Applicants with the best credit, which is represented by a FICO score of 675 or above, will often be charged between 1% and 3% of the full bond amount. For a surety bond worth $50,000, this means paying between $500 and $1,500.

For applicants with average credit history, or a FICO score between 650 and 675, it is common to be charged between 3% and 5%. That means paying between $1,500 and $2,500 for a surety bond worth $50,000.

For a more accurate estimate based upon the type of bond you need, and your personal credit, you can apply for a free quote today.

Starting your bonding process is simple. You must first apply online and submit the necessary documents that accompany your bond application. We’ll get back to you with your free bond quote in no time. If you are happy with your bond quote, we can quickly pass you along in order to get you formally bonded.

You can get more information about bonding on our how to get bonded page.

Depending on the state in which you are based, you’re likely to have to renew your used car dealer license annually or biannually. Every time you renew the license, you have to do the same for your used car dealer bond.

With Lance Surety Bonds, you will get a renewal notification a few months in advance of the expiration date. We will contact you via mail, fax and email and will follow up by phone if necessary. You’ll have enough time to complete the renewal, so that you stay in compliance and keep your license active.

Should you violate the obligations to which you are held by your surety bond, you may face a claim. This is to be avoided, as proven claims can cause serious harm to your dealership.

If a claim is found to be valid, the surety will pay damages to affected parties up to the value of the bond, after which you will be obligated to repay the surety.

Avoiding claims is a top priority for used car dealers in order to keep a strong and trustworthy business. Getting bonded after a claim is very difficult, so it is prudent to avoid claims in the first place.

If you haven’t found what you’re looking for or want to learn more about Used Car Dealer Bonds, then you are always welcome to contact us on 877.515.4146 Equally, you can reach out to us on our chatbot.

Additionally, feel free to check out the Lance Surety Blog for all the most important information and updates in the bonds industry.