What You Need to Know About Auto Dealer Bonds

What You Need to Know About Auto Dealer Bonds
September 25, 2017 admin

If you’re going to open a used car dealership, most states will require you to file a Surety Bond with the Department of Motor Vehicles. It can be a pretty confusing process, but we will try to break it down into easy to digest terms.

There are 3 active parties to a Surety Bond:

  • Principal: The member of the agreement who needs the bond
  • Obligee: The member of the agreement who requires the bond and is protected by it
  • Surety: The member of the agreement who issues the bond

A Surety Bond promises that you will perform and fulfill your duties as a dealership owner. These bonds protect consumers and the state from auto dealers that may commit fraud. And, they help to ensure your dealership will follow the proper regulations in your state. If a claim is made, surety bonds will protect the consumer, financial institution, government agency and seller recover from a financial loss due to a dealership’s unethical business practices.

Depending on the type of dealership you run you may need to file one of many different types of auto dealer bonds. Examples would be; DMV Bond, Used Car Dealer Bond, Motorcycle Dealer Bond, RV Bond, and Wholesale Car Dealer Bond.

You may be thinking, “I already have insurance, why do I need to be bonded?” Auto dealer insurance and auto dealer bonds are two completely different forms of protection. Your auto dealer insurance protects your business in the case of a claim. When an insurance claim is paid, it’s paid by the insurance company. The insurance company does not require you to pay them back for the claim. Surety bonds, however, protect the obligee (the one who requires the bond). When a surety bond is paid, it’s paid by the surety company. And, that company expects that YOU pay every cent back.

What are the steps to acquire a surety bond for your car dealership?

First, you need to find a reputable bond agency. One who knows the ins-and-outs of auto dealership bonds and has access to the best programs in the market. After you’ve found best bond agency for your dealership, the process is pretty straight forward:

  • Submit a complete application
  • Underwriting will review your risk and determine your bond rate
  • You will receive quotes
  • You must sign the indemnity agreement
  • Pay for your bond

Used dealership bond contract

What does a car dealership bond cost? 

Many factors will contribute to the cost of your auto dealer bond. One factor depends on your entire bond amount and what is required. Another factor is largely based on your personal credit score. Those with a good credit score may pay much less than those with a poor credit score.  And, a final example of a factor that will affect your bond cost is the historic risk of the type of bond you wish to acquire. If a certain state sees significant losses with a particular bond, the surety company may charge more to off-set the risk and the cost of their previous losses.

How to avoid a dealership bond claim? 

As you know, the best way to avoid an auto dealer bond claim is to run an honest and ethical dealership. Be sure to familiarize yourself with your state and federal regulations. Understand all that you’ve agreed upon when acquiring the bond. And, do your best to work out any disputes or disagreements that may arise with your customers in a professional manner.


Of course the used car dealership game can get pretty crazy, look for expert advise on all of your insurance and bonding needs. And, be sure to  check out our post to learn more about Starting a Used Car Dealership.


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