Comprehensive Auto Dealer Bond Guide

TLDR: auto dealer is a great profession to earn a living, especially if you understand and love cars. However, to officially operate as an auto dealer in almost all states, you need an auto dealer license. In order to get an auto dealer license, you need an auto dealer bond. This article focuses on all you need to know about auto dealer bonds. It starts by explaining what an auto dealer bond is and who needs it, then it talks about the cost of a bond and how to get a bond. 

What is an Auto Dealer Bond? 

An auto dealer bond, also known as auto dealer bond, car dealer bond, is a type of surety bond that car dealers must obtain to legally operate their business in a specific state. It is a three party contract where the surety company (the surety) guarantees the auto dealer (principal of the bond) will comply with all auto dealer laws and regulations required by the Department of Motor Vehicle (the obligee). In the event that the dealer fails to fulfill their obligations, i.e., not remitting sales taxes to the government or committing fraud, a claim can be filed against the bond to provide financial compensation to affected parties. This bond is required in many states in the US as a means of protecting consumers from fraudulent and unethical business practices by auto dealers.

In another sense, the auto dealer bond acts as a filter to ensure that only credit worthy and financially secure auto dealer applicants can be bonded. This is because to get an auto dealer bond, a credit check is required. Some surety companies won’t provide a bond to applicants with a substandard credit score. 

How is An Auto Dealer Bond Different From Other Insurance

An auto dealer needs many types of insurance, including garage liability insurance and maybe workers compensation insurance. However, an auto dealer bond is quite different from insurance. The most common insurance that auto dealers get is commercial property insurance. Let's see how this is different from an auto dealer bond.

Auto Dealer Bond v.s. Commercial Property Insurance

‍

Who Needs An Auto Dealer Bond? 

In most states, anyone engaged in the business of buying, selling, and trading motor vehicles need an auto dealer bond. Different states have different ways of defining the “business of buying, selling, and trading motor vehicles”, mostly by the number of cars they are selling and the purpose of the trade. In California, even buying, selling and trading ONE motor vehicle purely for profit is basically in the business of motor vehicle dealers. In Florida, buying, selling and trading more than 3 vehicles not titled in your name and purely for profit is considered the business of motor vehicles. In Texas, that number is more than 4 vehicles. The best way to confirm whether or not you need a dealer bond is to check DMV.ORG to find out specific state requirements. 

On the other hand, if you are a private seller who is trying to get rid of an extra vehicle you don’t need, then you don’t need a dealer bond. 

Which State Requires An Auto Dealer Bond? 

All 50 states require motor vehicle dealers to obtain an auto dealer bond for their auto dealer license. 

Types of Auto Dealership and The Bonds They Need

The bonding requirement is different based on the type of motor vehicle dealership (i.e., franchise vs retail) and the types of vehicles they sell. 

• Franchise Dealer: a type of auto dealership authorized by an original vehicle manufacturer (i.e., Ford) to sell and service their vehicles. This is often the big and fancy dealership with a big sign of the car company. For some states, such as Florida and Indiana, the same bond covers both the franchise and used car dealers. For some other states, such as Maryland, different bond amounts are required for franchise vs used car dealer bonds. For other states, such as Texas, no bond is required for franchise dealers
• Independent Used Car Dealer: Independent dealers mostly sell used cars because they don’t have an established agreement with the original vehicle manufacturers. In almost all states, used car dealer needs an used motor vehicle dealer surety bond
• Wholesale Dealer: wholesale dealers are only allowed to sell, buy, and trade cars with other dealers. While some states allow wholesale dealers to utilize the same surety bond as retail car dealers, others mandate a separate bond, such as California. 
• Wholesale Auction Dealers: dealers who sell cars at dealer auctions, which are only open to other dealers. Some states, such as Colorado, require a distinct bond for auction dealers
• Salvage Dealer: dealers who buy, sell, or auction vehicles that were declared a total loss by insurance companies due to collision, fire, flood and other causes. A few states require applicant to get salvage dealer bonds, such as Georgia, Alabama, and Arizona 
• Trailer/Motorsports/RV Dealer: dealers who sell vehicles other than traditional cars, such as trailers, motorcycles, ATVs, and RVs. Many states don’t require a separate bond for these deals but some do, such as Florida. 

How Much Does An Auto Dealer Bond Cost? 

The cost of an auto dealer bond depends on two factors, the bond amount and the premium % on the bond amount. The resulting premium of the bond is simply a multiplication of bond amount and the premium % on the bond.

The bond amount is basically the maximum coverage of the bond if a claim is made. For example, a $50,000 Alabama Auto Dealer Bond basically means that if a claim is made against this particular bond, the maximum amount that the surety company will pay out is $50,000.

The premium % on the bond amount is mainly determined by applicant credit score, credit history (i.e., any history of missed payment), years of experience in the industry. 

• Credit Score + credit history: this is the most important factor in determining the rate on the bond because it is a sign of how trustworthy the applicant is. If an applicant has a high credit score and no missed payment in his or her credit history, it means that the applicant is more likely not to violate any laws that could result in surety claims. 
• Years of Experience: experience and expertise are also signals that the applicant is less likely to violate any laws that would result in surety claims. More experienced dealers know the laws better and have better reputation in the industry that they may not want to ruin by violating any auto dealer laws. Therefore, their surety rate tends to be lower than a less experienced dealer. 
• Any past surety claims: if the applicant has made surety claims in the past, he or she is more likely to face a higher rate

Below is a list of bond amounts and bond premium ranges for different states. The reason that this is a range is because depending on the credit score, the price will vary. For example, for Texas auto dealer bonds, someone with the best credit score will get a bond for $250 whereas someone with a sub-standard score will get a bond for $3,500. 

In addition, note below that some states have different bond amounts for dealers depending on how many cars that the dealers sell per year. For example, Maine has the following bond amount requirement based on the number of cars sold per year 

• Bond amount of $25,000 for 0-50 cars sold per year
• Bond amount of $50,000 for 51-100 cars sold per year
• Bond amount of $75,000 for 101-150 cars sold per year
• Bond amount of $100,000 for 151+ cars sold per year

‍

State Requirements for Dealer Bond

Because motor vehicle dealer bond is a state requirement and every state has different laws, there are many differences in the dealer bond requirement per state. Here are some things we would like highlight: 

• Some states have fixed expiration dates for their auto dealer bond. For example, Florida independent dealer bond expires on April 30th, recreational dealer bond expires on September 30th, and franchise dealer bond expires on December 31st. Take another example, Georgia auto dealer bond expires on March 31st for even-numbered years and December 31st for odd-numbered years.  
• Some states include other auto services (i.e., towing and repair service) within the scope of auto dealer bond. However, other states, such as Connecticut, has a separate bond for motor vehicle repair companies 
• Some states have a default two-year term for the bond, such as Texas. Other states does not have strict term requirements for the bond

How to Get An Auto Dealer Bond?

Step 1: Determine Your Bond Requirements

Almost all states require auto dealer bonds to operate a dealership. However, the bond amount differs depending on the type of vehicles you plan (RVs, etc.)  to sell and the operations of your dealership (wholesale, retail). 

Step 2: Apply Online for Your Motor Vehicle Dealer Bond

You can apply online for your auto dealer bond. Simply fill out a 3 minute form and we will approve your bond within a day. We typically collect the legal name of the dealership, the address of the business, the owner’s name, address and social security number for the soft credit check.

Step 3: Sign and Submit Your DMV Bond to the State

Once you receive the bond from us, you need to do the following: 

• Print and sign your bond
• Make a copy of the bond for you records
• Mail the signed bond, along with other paperwork required by the states, to the state DMV. 

What Would Trigger Filing of a Claim? 

A claim can be filed if the dealer being bonded violated some laws and regulations of the industry. 

There are many reasons that claim can be filled, including the following:

• Misrepresenting a vehicle conditions, such as tampering with the odometer or installing sub-standard parts
• Don’t pay seller of vehicles promptly and in full 
• Don’t honor warranty agreements
• Selling vehicles without a valid tag 
• Misrepresent personal financial information to auto loan lenders
• Fail to remit sales taxes to relevant state authorities 
• Fail to deliver a valid title for a purchased vehicle

In addition, there are many parties that can file a claim under the dealer bond, including:

• Consumers who bought the vehicle from the dealer
• Seller who sold a vehicle to the dealer
• Auto loan lenders who provide auto loans through the dealer
• State DMV who issue the dealer’s license 

The Claims Process 

Typically, there are many stages for a claim process. Typically, a party would contact the dealer first to make a complaint. The dealer would then investigate the complaint and resolve the issue with the claimant. If the issue is not resolved in the eyes of the claimant, he or she can find the license and bond of the dealer (typically you can find it on state DMV site), and then file a claim against the bond to the surety company. 

Once the claim is filed, the surety company will investigate and decide whether the claim is valid. If the claim is not valid, the surety company will close the claim case and no further action is warranted. If the claim is valid, then the surety company will pay the claimant. However, the dealer whose bond has a claim is not off the hook. The surety company will try to recoup as much cost as possible from the dealer. 

Can you finance your dealer bond? 

Yes, but it depends on the bond premium. If your bond premium is sufficiently large, say $1,000, then you can choose a premium financing option of 30% down payment and then 11 installments to pay down the rest. If you don’t pay a particular installment by the due date, then the bond will be canceled on that date.

Is a Credit Check Required for An Auto Dealer Bond? 

Yes. As mentioned earlier, the bond premium is partially determined by the credit score and credit history of the applicant. Therefore, to get an auto dealer bond, you would need to go through a credit check. The good news is that only a soft credit check, which does not hurt your credit score. 

If I have a substandard credit score, Can I Still Get a Dealer Bond? 

Yes, even if you have a substandard credit score, you can still get a dealer bond, but not all surety companies will be able to approve you. In addition, your bond price will be much higher because insurance companies think there is a higher probability that a claim will be made against your bond. Things like missed credit card payment or tax liens on your credit report negatively reflect your ability to handle your finances. 

SuretyNow works with adverse market surety carriers that can accept applicants with substandard credit scores.