Surety Bond in the Automobile Industry

You’re probably thinking of buying that new gorgeous model out in the market just recently while thinking of better ways to protect yourself. Or maybe you’re an auto dealer and most likely wondering why your customers file these so-called surety bonds and what you can actually do to prepare yourself when faced with this kind of situation. Worry not, for, in this article, we will talk about surety bonds in the automobile industry and hopefully, every question you’ve always wanted an answer to will be tackled.

So, first of all, let’s refresh our memories and ask ourselves what exactly is a surety bond? A surety bond is an agreement among three parties: namely, the surety, the principal (auto dealer), and the obligee (consumers). This kind of contract guarantees the protection of the obligee through the principal’s pledge to follow through its obligations or payment to the obligee. In the event where the principal fails to do its duties, the surety will step in and provide the payment, comply with the requirements, or hire another contractor to do the principal’s work (in contract bonds).

Despite its different variations, that is the general description and purpose of a surety bond, but what about in the automobile industry? What exactly is its use in the world of vehicles? Is it advantageous for the auto dealer, or for the consumers?

Understanding your surety bond

People all around the world are recently becoming even more and more interested in investing in all types of vehicles. In fact, vehicles are now the second largest investment next to houses and other living accommodations.

However, it is also because of this popularity that dishonest and illegal practices are abundantly found in the industry of buying and selling new and used vehicles. Consumers all around the world file complaints on a daily basis and statistics show that auto dealers are commonly accused. This is where surety bonds come in.

Companies that are in the business of buying, selling and transferring titles of various types of motor vehicles are usually demanded to obtain a Motor Vehicle Dealer bond or an Auto Dealer bond before they can receive their license to sell. While it is also known by other names, such as Used Car Dealer Bond or DMV Bond, they all have the same motive: to protect consumers from fraudulent auto dealers and to guarantee that these dealers will act in accordance to local or state laws and regulations.

Some usual illegal activities connected to auto dealership include but are not limited to: providing false information about a vehicle during selling, deceiving customers related to financing, selling stolen cars, tampering with the odometer, failing to pay the purchased warranty, and failing to report the sale or provide a valid title.
If suspicious activity is suspected, consumers are entitled to file a claim on the bond from the surety company. The surety company will have to assess the situation and once foul play has been confirmed, they will have to pay financial recompense for the customer’s losses. Of course, the auto dealer company will also be responsible to compensate the surety company afterward for their expenses.

Another important thing to point out and remember is that your surety bond is not your insurance. It might confuse new professionals in the field but to distinguish between the two of them, the surety bond provides protection to customers, whereas the insurance protects dealerships.

The process of getting bonded

When thinking of applying for an auto dealer bond in order to get licensed, you should first look into the current licensing requirements of your city or state and gather more information about it. Otherwise, getting your license without a valid surety bond will mean operating an illegal business, which will eventually lead to charges and fines, and having your license revoked.

The application process for getting your auto dealer bond is fairly easy and straightforward. Applying online and getting a quote these days has become possible. However, make sure you have your auto dealer expert to guide you through the process. Once you have connected to the right surety agency and can provide basic information and essential documents, such as personal and business financial statements, and ownership structure and information on the owners, then you’re good to go!

What about the costs?

Depending on your credit report history, your annual premium can vary extensively. The annual premium would be the percentage of your total bond amount, which may range from 0.75% to 3% if you have a good credit report. However, for those struggling with financial problems and bad credit history, your premium may rise up to 10%.

Other factors that may also have a huge impact on your premium would be your professional experience in the industry you’re in and the total financial capability of your company. Previous claim activities will also have an influence, so it is best to keep in mind to do everything that will help you to avoid a claim for future purposes.

However, there are certain techniques you can most definitely use to avoid a high premium. First, be cautious in picking the surety company you want to connect with; you want to make sure they understand your needs and they have the right programs you want to apply to. Once you’ve been connected to a surety bond provider, ensure that you do whatever it takes to indicate your considerable experience in the field and provide whatever proof you have relating to your strong financial status and other liquid assets. It is also a good idea to remember any credit report red flags you may have, such as tax liens and civil judgments, and start the process in tidying them up.

To sum up, with the information and official documents you have submitted to the surety agency, your application will be most likely approved with lower premium if you have good credit standing, are financially stable, and have a reputable history in the industry you’re working in.

Tips to protect your dealership

Millions of customers exist in the automobile industry alone so it will come as no surprise if you do encounter claim activities. Therefore, as a dealer, it will also be your responsibility to be ready and look for ways to protect yourself if these situations do happen.

One obvious thing you should do is to adhere to the laws in an auto dealership. We don’t think there is anything to worry about anyway if you yourself know you’re running a completely honest dealership and if you have been strictly adhering to state and local policies.

A second way to guard your dealership from serious problems is to make certain you renew your bond diligently and to continue updating your license before it expires. Aside from contributing to a dependable history, this would also help you in pleading your case effortlessly whenever an unsatisfied customer might complain before it can negatively impact your business.

Once a claim has been made, you as an auto dealer should make sure your proceedings is free of deceit yet at the same time, ask your customer to send evidence indicating their loss and keep a record of every written and verbal communication, statements, and agreements. Also, be on the lookout for any kind of solution you can employ for the current problem instead of just waiting until the complaint becomes an official claim against your surety bond. However, the best and most effective way you can do to avoid impediments is to always be reminded and set to follow the rules of your local motor vehicle department, and accomplish all written terms of any contract.

Make use of your surety agency

Whenever you’re confused on anything about your surety bond, your surety agency is there for you to approach and ask for help. Especially in cases where a claim happens, invoke your right to tell your side of the story (after listening to your customer and having been handed out a proof of loss that is).

The good news is that your surety agency can actually offer your dealership legal defense when you think the claim is unfair. When this happens, payout does not happen as the claim is not found to be valid. On the other hand, once a claim is assessed to be authentic due to any carelessness or irresponsibility in your part, you would certainly have to compensate the surety agency’s expenses for the claim, along with any legal fees.

For claims triggered due to a misunderstanding between you and the claimant, make sure to try to solve the problem first by reaching out to your customer while continuing to update your surety agency. If you’ve chosen the right agency, they should be able to be present at this time and fight with you.

In conclusion, auto dealer bonds are a requirement if you plan to be legally licensed in the business of selling new and used cars in order to assure your customers the protection they look for. As the automobile industry is thriving more and more each year, several fraudulent activities have been reported thus the need for a surety bond.

Once your business is armed with good industrial reputation and clean financial history, then there’s no need to be intimidated—you can most likely expect a hassle-free application process.

Hands holding blackboard with a safe

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