What is the difference between earnest money and advance payment? This is a question that we can ask ourselves with many smaller or larger investments that involve prepayment. In the case of an advance or an earnest money, this is what it looks like - we usually pay them at the beginning of the transaction (unless the contract provides otherwise). However here the common features of both concepts end. So what are the differences between these definitions?
Earnest money – it is part of the payment for a good or service that is intended to protect both parties to the transaction. It is specified when the contract is signed and is intended to ensure that the transaction will be completed. This is usually around 10% of the full amount, but it may not be the same. For example, if a customer wants to buy a car and makes a down payment of 10%, and then decides to withdraw from the transaction, this amount is not refunded. The same applies to the seller - if the contract does not come into force, the customer receives twice the deposit paid by him. In the absence of a contractual stipulation or a custom to the contrary, earnest money paid upon the execution of a contract means that, if the contract is not performed by one of the parties, the other party may,without setting an additional period, rescind the contract and retain the earnest money, and if it was the partywhich paid the earnest money, it may demand twice the amount. The earnest money is therefore part of the payment and is not refundable under normal conditions. The exception are situations when a special clause in the contract is made, specifying the terms of return.
Advance payment – it is also part of the payment for goods or services, but unlike the earnest money, it may be refunded. This means that when paying the advance, the buyer can count on the refund if he changes his mind. The advance payment is therefore a security for buyers, less for sellers, who can only deduct the costs of transporting the goods (if it had to be collected from distant places). It is not a collateral.
Both the earnest money and the advance payment are made at the beginning of the transaction and cannot correspond to 100% of the payment for the entire service. The earnest money, however, has a compulsory effect - if the contract is not concluded, then the person at fault must bear its costs. However, in the case of a advance payment, the buyer usually just gets the money back. Therefore, when we are a seller, it is much better to include the earnest money in the contract , because it guarantees a refund of the costs incurred, especially, if the customer does not decide to make a transaction. On the other hand, from the customer's perspective, an advance payment is often better, as it allows you to withdraw from the contract without losing capital.