Types of Surety Bonds Needed for the Auto Industry

Many Americans rely on their automobiles for just about every aspect of daily life. So it’s incredibly important that the vehicles which take parents to work and kids to school be sold and serviced by licensed, responsible business people.

Surety bonds are a common requirement for many kinds of businesses that deal with automobile sales and service. These bonds help protect the customer and driver while keeping auto industry businesses accountable. Businesses including new and used motor vehicle dealers, brokers, wholesalers, and auto parts dealers may have to purchase any of the different types of surety bonds before they can obtain a license from state or local authorities.

What are the major types of surety bonds that an auto industry business should be familiar with? Below, we’ll discuss five important types of surety bonds for the auto industry.

How Surety Bonds Protect Auto Industry Customers

A surety bond is a type of three-party contract that guarantees an obligation such as performance, payment, or lawful conduct. In the case of auto industry surety bonds, the bond financially protects the business’s customers and creditors, as well as the state government, from illegal or unethical conduct by an automobile business. For an in-depth guide to the basics of surety bonds, see What Is a Surety Bond?

Typically, the state government is the party that requires an auto business to purchase a surety bond. Once the business has purchased the bond, they must submit the bond paperwork along with their application for state licensure. Then, should a customer or the government believe that the business has broken the law or acted unethically, they can submit a claim to the surety for financial compensation.

Motor Vehicle Dealer Surety Bonds

Auto dealer bonds are the most common type of auto industry surety bond. Most states require motor vehicle dealers to get a surety bond to get their auto dealer license. These bonds help protect vehicle buyers, suppliers, state taxpayers and creditors from unethical or illegal conduct by an auto dealer, including:

Falsifying information about a vehicle
Failing to pay sales taxes on a vehicle transaction
Failing to deliver a valid and genuine certificate of title to a vehicle buyer

Each state requires different terms and bond amounts for an auto dealer surety bond, and many states also require slightly different bond types for various types of auto dealerships. Used vehicle dealerships, new vehicle dealerships, salvage dealerships, and auto auctions all typically fall into different categories. A business purchasing an auto dealer surety bond should be sure to check the specific bond requirements for their business category.

Other Important Types of Surety Bonds for the Auto Industry

Motor vehicle dealer bonds are the most common type of auto industry surety bonds, but many other types also exist, including:

Automotive Dismantler or Parts Recycler Surety Bond: In a few states, salvage businesses that dismantle automobiles for parts or recycle used auto parts have to obtain a surety bond. These surety bonds are particularly important because auto salvage businesses often work with hazardous substances that can damage the environment if disposed of improperly, and they may also have access to vehicle license plates and other materials that can be used for illegal purposes. Thus, an auto salvage surety bond is required before these companies can receive a business license.

Title Company Surety Bond: Title companies help other businesses, such as auto dealerships, and consumers process the paperwork necessary for a title transfer, which means that a title company takes on significant legal responsibility and must conduct itself ethically. A title company surety bond helps ensure that a title company is accountable to its customers and the government. Only a handful of states require title company surety bonds—but be sure to check our list to see if your state is one of them.

Certificate of Title Surety Bonds (aka Bonded Title): Many states require a surety bond in the event that a vehicle title is lost or damaged. Dealers purchasing or accepting a trade-in for a used vehicle may see bonded titles which serve in lieu of a standard vehicle title for a prescribed period (usually 3-5 years) to ensure that no other claims can be made to the title of the vehicle. The bond is generally filed with the DMV and should be on record by owner and VIN including the specific expiration date.

Motor or Automobile Club Surety Bond: Some states require surety bonds for motor or automobile clubs, which are membership organizations that offer services for travelers and vehicle owners. Automobile club surety bonds help make sure that these businesses conduct themselves ethically and follow state laws.

Driving School Surety Bond: Driving schools, especially driving schools that offer instruction for commercial drivers’ licenses, must obtain surety bonds to protect customers in case the driving school commits unethical acts. Sometimes, these bonds also guarantee students the return of their tuition if the driving school goes out of business before the student can complete their classes.

Whatever types of surety bonds your auto business needs, Surety Bonds Direct provides customer-friendly service that will have your business on the road faster. If you’re ready to get started on getting your surety bond, call our experts at 1-800-608-9950 or get a free online surety bond quote in just minutes.

Jason O'Leary

published: January 8, 2021
updated: March 17, 2021