2014 is a year of changes for the auto dealer industry. As laws change and new bills get passed, it’s imperative to stay up-to-date on the latest requirements.
One of the changes motor vehicle dealers must adapt to this year is the surety bond increases in some states. These state-required bonds vary from state to state, with Alabama and Wisconsin taking the lead by doubling the existing bond amount in 2014.
These sizable hikes may seem like a burdensome thing to auto dealers, but there is solid reasoning behind them.
Anti-Fraud
The number of auto dealers in the U.S. has been on the rise for the last three consecutive years. This makes it one of the fastest growing industries in the country.
According to the latest statistics, in January 2013, the number of motor vehicle dealer companies in the U.S. was 17,851. This marks a 0.5% increase from a year ago.
Along with the growth in the number of dealerships, the number of vehicle sales has also gone up. According to Urban Science’s analysis the number of cars sold in 2012 was 14.5 million — 13% more than in 2011. And in 2013, automakers reached the best numbers in six years in the United States, with a total of 15.6 million vehicles sold.
Also, there are 210 million licensed drivers in the country, making the demand for new or used cars very large. This has made the industry an excellent target for fraud, sparking action by state governments to minimize that risk.
The way surety bonds work is if you are unable to deliver what you have contractually agreed with your client, the surety provider will cover your client’s losses. The surety bond company can pay as high as the full required amount of the bond, however you will be responsible to reimburse the company.
There are countless businesses required to have surety bonds for licensing and updates in bond requirements are nothing new. To make sure dealerships operate according to state regulations and that any damage caused by the business is fully covered, states are sometimes forced to increase the bond requirements adequately.
Better Protection for Customers
Since bonds are meant to protect the end customer (not the business), a higher surety bond requirement for auto dealers means that customers will have a bigger safety net in case the contract terms are not met.
Also, with the constantly increasing car prices, there has been a need for an increase in the surety bond requirement in order to cover potential claims. For example, with the surety bond increase in Wisconsin, if you are a victim of fraud, you can be paid up to $50,000, instead of $25,000.
Ethical Competition
To obtain a bond you need to have a certain level of financial stability. The higher the surety bond amount, the more liquid you need to be. With the increased requirement on auto dealer surety bonds there are grounds for more ethical competition. The reason for that is presumably all “phantom” dealerships who are looking to rip people off will be unwilling or unable to pay the increased premium. Unfortunately, the downside is that big increases in the bond amount could sometimes force smaller dealerships to go out of business.
Nevertheless, there are ways to cut your bond cost. The fact that the requirement for a surety bond is $50,000 does not mean that you will have to pay the amount upfront. When you are getting bonded, you pay a percentage of the bond to the surety company. The percentage is calculated by taking your personal finances and credit history into account. Having a good credit history will surely decrease your bond costs. People with bad personal credit can still get bonded, but will have to pay a larger percentage of the surety bond requirement. For them, it is usually between 5% and 15%.
The Bottom Line
The bottom line is that an increase in the auto dealer surety bond requirements does have a solid reasoning behind it, if we look at the big picture. The increase will lead to insurance for the public, better coverage of possible claims costs and more ethical competition.
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