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What is a Dealer Bond?

Josie Myers
Josie Myers

An automotive dealer bond is a type of surety bond. It guarantees that an automotive dealer will operate within the terms of the state including consumer protection laws and payment of tax. It can sometimes also be called a motor vehicle dealer (MVD) bond, Department of Motor Vehicle (DMV) bond, motor vehicle bond, or auto dealer bond. When working within a specific industry, it can be called a used car dealer bond, recreational vehicle (RV) dealer bond, or motorcycle dealer bond.

In general, a surety bond in is an agreement between three parties. These kinds of bonds ensure that a given person will perform their duties as required by law. If they do not, the surety pays out any financial damages to the buyer.

Man with hands on his hips
Man with hands on his hips

The three parties are called the principal, obligee, and surety. The principal is the primary party, in this case the automotive dealer. The obligee is the one who receives a service, or the car buyer. The surety ensures that the principal delivers on their obligations to the obligee. For the dealer bond, the surety makes sure that the automotive dealer works under state and local laws in the sale of a vehicle.

Basically, automotive dealers must comply with the laws. If they do not, the dealer bond covers the expenses incurred. A dealer bond does not protect the dealer, but rather protects the buyer.

All auto dealer bonds have a set penal sum. This sum tells the maximum amount of money that the surety will pay out in case the principal defaults. This protects the surety from paying out an exorbitant amount of money in case the dealer defaults on their obligations.

Much like insurance, a dealer pays a premium in exchange for the surety to protect their customers. This premium amount is based on the track record of the dealer and the risk that the surety is taking in exchange. Bond holders have become increasingly scrutinizing of automotive dealers, and so costs have risen. Those dealers who are more risky still have bond options, but they will be significantly more expensive than dealers who have routinely met their obligations.

In the case of a claim, it will be fully investigated. If that claim is found to be valid, the surety pays the obligated amount to the buyer up to the amount of the penal sum. The principal must reimburse the surety along with any additional legal fees. Regular claims will make the dealer less appealing for bond companies.

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