Trust is important between all parties involved in motor vehicle-related businesses. Clients trust that the dealer has disclosed all the details regarding the vehicle. On the other hand, creditors and sellers trust that the vehicle dealer will pay them for financing and inventory. State governments also trust that auto dealers will operate within the law and pay tax.
Motor vehicle dealers must earn trust from all these parties to ensure business growth. One way to build trust is by making sure that all the relevant third parties are fully protected in case of a violation or a dispute. This is where auto dealer bonds come in.
Motor vehicle dealer bonds offer protection for creditors, customers, and governments. Many state governments require auto dealers to acquire these bonds before the state issues a license. Also known as car dealer bond, MVD bond uses a third-party guarantor to offer a guarantee that a dealer will operate their business in compliance with ethical and legal standards.
Are you an auto dealer, and you intend to obtain an MVD surety bond? Well, there are important facts about bonds you should know before you begin your search. These facts include;
How does an MVD bond work?
An MVD bond is a certain type of surety bond. These are third-party contracts that guarantee that the principal (one party) will obey the ethical rules and laws require by the obligee (the other party) with a surety (the neutral third-party) serving as the guarantor.
In the case of MVD bonds, the motor vehicle dealer is the principal, the Department of Motor Vehicles is the obligee, and the surety can be any of the insurance agencies that offer surety bonds services. Unlike all other types of insurance cover that auto dealers carry, surety bonds protect creditors, customers, and other third-parties, not the dealer.
If any of the third parties mentioned believes that the dealer has violated the initial agreement or failed to act ethically, the law allows them to file a claim with the surety that issued the MVD bond. Some of the third parties who can file a claim against the auto dealer include;
- Entities who purchase vehicles from the auto dealer
- Vehicle sellers who sell to the vehicle dealer
- The state regulators who issue the dealership license
- Specific creditors who financed the dealers’ inventory
- Different leaders who offer consumer financing via the auto dealer
Some of the top reasons a third-party can file a claim against the auto dealer include;
- Failure to deliver the right title certificate for the vehicle bought
- Failure to report the vehicle’s sale
- Misrepresentation of the condition of the vehicle
- Selling a stolen vehicle
- Failure to pay vehicle sales tax as required by the state law
Motor vehicle dealer surety bond creates a higher level of trust between the dealer and all other parties involved. Note that many states provide a searchable online database of all licensed dealers so that anyone can easily verify whether a specific dealer is licensed.
Interesting related article: “What is a bond?”