An auto dealer bond is a kind of surety bond intended for those individuals or corporations that sell vehicles to the general public. Irrespective of whether you are a new or a used car dealer, the bond is required in most states before obtaining and maintaining a license as a dealer in the state. An individual seeking to venture into the auto sales seems incomplete unless he or she understands how the auto dealer bonds operate, the reason why they are required and what they cover.
What is an Auto Dealer Bond?
An auto dealer bond is a three-party agreement between the principal(the auto dealer), the obligee(the state licensing authority), and the surety(the bonding company). This guarantee ensures that the dealer will be doing things in terms of what the state laws or regulations entail. In case the dealer has acted in an unethical or illegal manner, e.g. using odometer fraud, not transferring vehicle titles, or withholding sales tax the state or damaged customer may put in a claim against the bond.
It should be mentioned, that an auto dealer bond does not cover the dealer. Rather it saves the consumer and the state the cost of losing the money that the dealer has lost as a result of misconduct. In some situations, such as when ownership documents are missing or unclear, a Certificate of Title Bond may also be required to establish legal ownership of a vehicle. When a valid claim is asserted, the surety can make a compensation as per the amount of the bond. The dealer, however, has the legal requirement to reimburse the surety on any loss indemnified.
Why do you Need One?
State governments need auto dealer bonds so that the general population will trust them and hold them accountable in the business of selling vehicles. The provision of bonds by dealers would allow states to ensure customers against the traders propagating fraud or unscrupulous activities, in addition to enforcing the observance of statutes like the validity of documents used to transfer a vehicle, the history of the vehicle, payment of corresponding fees/taxes.
Devoid of this relationship, the states would have had fewer channels of dealing with such fraudulent traders. The bond also offers financial cover and redress when something goes awry in the process of purchasing a vehicle as a customer.
Bond Amounts and Costs
According to the state and the kind of dealer license, the necessary bond amount and associated expenses can differ substantially. State laws determine bond amounts, which normally fall between $10,000 and $100,000. Dealers, however, refrain from paying the entire bond amount up front. Rather, they pay a premium, which is a tiny portion of the bond’s total amount. This premium is typically between 1% and 10%, depending on the applicant’s financial situation, business history, and credit score. For instance, the dealer would pay a $1,000 premium per year if a state mandates a $50,000 bond and they are eligible for a 2% rate.
How Long is the Bond Valid?
Although some states permit multi-year terms, the majority of auto dealer bonds have a one-year expiration date. To keep their license, dealers need to renew the bond before it expires. Dealer license suspension, fines, and other sanctions may follow lapsed bonds.
How to Steer Clear of Claims?
Dealers must operate honourably and adhere to all relevant state laws to prevent bond claims. Typical infractions that result in claims include:
• Not giving the buyer the vehicle title;
• Not paying taxes or liens;
• Falsifying the vehicle’s history or condition;
• Violations of a sales contract