Most states don’t make a distinction between new and used car dealers when it comes to their licensing requirements. However, some states, like Arkansas, Maryland, and Texas, have separate licensing and bond requirements for both new and used dealerships.
Surety bonds are legal tools used by regulating authorities to encourage ethical behavior among auto dealers. They also help protect consumers in the event a law or regulation is violated.
In general, a bond acts as a contract between three parties:
The policy needed to obtain your business license as a used car dealer is typically referred to as a Used Motor Vehicle Dealer Bond. Though some states may also use the term Independent Dealer License Bond. In all cases, the bond serves the same primary purpose.
States that make a distinction between new and used dealer licenses typically require a lower bond amount for used car dealers. For example, Arkansas requires used car dealers to only post a $25,000 bond, while they require new car dealers to post a $50,000 bond.
Bond amounts can also vary depending on the number of cars you sell in a year. Maryland requires a bond as low as $15,000 for dealerships that sell less than 250 vehicles in a year. Meanwhile, dealerships that sell over 2,500 vehicles in a year must post a $150,000 bond.
Regardless of the bond amount required, your cost as the principal will only be a small percentage of the policy amount—this is known as the bond’s premium.
Premium rates are determined by several factors, such as the applicant's finances and credit rating.
|State||Bond Amount||Cost* (Annual Premium)||Arizona||$20,000 – $100,000||$200 – $1,000|
|Arkansas||$25,000||$125 – $250|
|California||$50,000||$800 – $1,500|
As noted above, Maryland differs from most states in how it determines the bond amount a dealer will need. Instead of requiring a fixed amount, Maryland bases this number on how many vehicles your dealership sells.
|Number of Vehicles Sold||Bond Amount|
|1 to 250||$15,000|
|251 to 500||$25,000|
|501 to 1,000||$35,000|
|1,001 to 2,500||$50,000|
You can find further information regarding Maryland vehicle dealer licensing and bond requirements by visiting the state's MVA website.
Your dealership is already required to have insurance, so you might be wondering why you need a bond on top of this. First, bonds are not insurance. While insurance helps to protect you and your business, a surety bond protects your customers and the state.
If you break a law or act in an unethical manner with a customer, a claim can be made against your bond. Should the claim be upheld in court, the surety company will pay the claimant up to the full sum of the bond. You will then need to repay this amount back to the surety.
In addition to having to repay the surety, a judgment against your bond can make it difficult to renew or obtain a new bond. In this way, bonds can help promote lawful and ethical behavior by business owners.