As practice shows, when making various transactions, oral agreements are not enough. Especially in cases where we are talking about the transfer of significant amounts of money. The most commonly used are prepayment and advance payment. Not everyone knows what the difference between these legal terms is. But in vain. Because a lot can depend on the wording. That's why it's worth spending a little time to save your own money in the future.
What is an advance?
Before figuring out the difference, you need to understand the concepts. Let's start with the advance. This is the name for a sum of money or other property that the debtor transfers to another party to fulfill obligations.
To put it simply, the advance payment is given so that the agreement can begin to be implemented. If the advance is not paid, then the other party has every right not to begin performing duties.
If the contractor, for any reason, refuses to fulfill his obligations, the advance must be returned in full. The transferred amount of money or property must not remain with the party who does not fulfill the obligation.
The advance performs two functions at once. On the one hand, it guarantees the execution of the contract. On the other hand, it confirms the fact that the customer’s side agrees with the terms of the agreement and will be obliged to pay the remaining amount.
Knowing what an advance and prepayment are, what the difference between these two legal concepts is, it will not be difficult to understand.
Conclusion. What is the difference between an advance and a deposit?
The deposit and the advance are similar. If you look for differences between these two concepts, then I would say this. An advance payment is a partial payment for goods; an advance payment is intended to partially fulfill a monetary obligation; after paying the advance payment, the obligation of the other party to fulfill the obligation may arise (or it may not arise). The deposit, by its nature, performs the function of both an advance and security of an obligation. But the main function of the deposit is precisely the security function.
In addition, if the cash payment is a deposit, then this must be clearly stated in the written agreement of the parties, otherwise it will be considered simply an advance payment.
What is prepayment?
This is another term you need to know. This will allow you to understand the difference between an advance and an advance payment.
As in the previous definition, the essence is that the deposited amount of money guarantees the beginning of the execution of the agreement. By making an advance payment, the customer confirms the fact that he agrees with the terms of the contractor and is ready to begin cooperation.
Also, making an advance payment confirms the obligation to pay the remainder of the entire contract amount. Moreover, do this not just sometime, but within a set period of time.
Another important nuance is that the prepayment must be made before the start of fulfillment of obligations, and not at the time of their fulfillment.
Types of prepayment
In trade and monetary relations, it is extremely important to protect yourself and your finances from scammers. This can be done in different ways.
ATTENTION! Advance payment is a specific amount of money that is transferred from the buyer to the seller as an advance payment for the transaction.
This fact is stated in the main agreement, but at the request of the parties, it is possible to draw up a separate document where the fact of transfer of money will be described. There are several types of prepayment:
- Prepaid expense
- Deposit
- Deposit (with some reservations)
The main difference between a pledge and other types of advance payment is the transfer of material assets (for example, a car, household appliances, etc.), but not money.
Is prepayment an advance or a deposit?
So, if you turn to the Civil Code, it is easy to find out that goods must be paid before or after receipt. To paraphrase, it becomes clear that the transfer of both money and the object should occur without a large time gap.
Prepayment is an advance payment made by the buyer before receiving goods or services. However, in return he receives the contractor's promise to complete the work or deliver the goods on time.
There is a small nuance that allows you to distinguish the two concepts. So, the advance payment only partially covers the cost of the contract. However, prepayment, depending on the conditions, may be full.
Tax and accounting professionals often perceive advance and prepayment as synonyms. The deposit has a slightly different meaning. Prepayment is, of course, an advance payment.
Agreement on deposit
The Civil Code of the Russian Federation states that the document must be drawn up in writing. There are no other writing restrictions. Let us note some points that are necessarily indicated in the document:
- The name of the agreement is indicated. For example, deposit agreement No. 1.
- The contact and personal details of the parties are indicated. For individuals - passport data, if desired, registration address. If necessary, the legal address of the facility. For legal entities - INN, OGRN, full name of the organization.
- The subject of the contract is described. If this is, for example, a car, then indicate its make, model, physical characteristics, color, number of owners, etc. The more specific and detailed the subject is described, the better. In some cases, for example, when selling an apartment, an address is enough because All characteristics are usually described in the main document.
- The amount of the deposit is stated. Moreover, the maximum number of situations that may affect the termination of the contract is indicated. Options for their solution, monetary compensation, and fines are described. This will avoid a lot of disagreements.
- Indicate the date and place of preparation of the document. It is certified by the signatures of the parties.
Let us note some nuances that will help you draw up a contract correctly and avoid conflict situations:
- It is not necessary to draw up an advance agreement . In this case, if the parties agreed on a deposit, but did not formalize it in any way, then it takes on a different meaning. In a legal sense, this is already an advance and, if necessary, it is subject to return.
- the deposit agreement must be certified by a notary . Otherwise, the paper has no legal force.
- You should consider the amount of the advance payment. It should not be too small so as not to raise doubts on the opposing side. Likewise, it should not be too large so as not to attract scammers. As a rule, the prepayment is calculated depending on the total amount of the transaction, with the practical amount not exceeding 10%.
Much depends on the nature of the contract and its participants. For example, for budgetary organizations the amount of the deposit cannot exceed 20%. Again, to avoid money fraud.
Sample
Prepayment and advance payment - what's the difference?
So, having clarified the features of each of the above definitions, you can find several features:
- Prepayment and advance payment are made before the start of fulfillment of the obligation; this is specified in detail in the contract. This action is performed by the responsible person.
- The advance and prepayment can be returned if the contractor for some reason fails to comply with the terms of the agreement.
The above features do not make it clear the difference between an advance payment and an advance payment. In fact, it is absent. The difference is that in economics and jurisprudence the term “advance” is preferred, while in everyday life it is “prepayment”. However, in some respects their essence is the same.
Pledge
Strictly speaking, from a legal point of view, a deposit cannot be called an advance payment option.
But, nevertheless, it is used periodically. Pledge is a situation where the guarantor of the transaction is any material assets, including an apartment .
True, then the collateral is called a mortgage. The main question in this case is the following: what to do with the property if the deal falls through?
The parties stipulate this clause in the main agreement or in a separate collateral agreement . You can give an example with an apartment.
It is usually put up for sale. Then the money is returned to the buyer, and the rest of the amount is taken by the bank.
IMPORTANT! Before transferring any property, the property must be assessed by an independent expert in order to avoid disagreements.
Are there any differences?
What is the difference between an advance and a prepayment? What is the difference? And does it even exist? So, you must understand that if the transaction is successful, there is no difference.
Advance, deposit, prepayment. What is the difference between these concepts? So, now you know that advance and prepayment are identical. However, the deposit carries a slightly different meaning. The difference becomes obvious and will matter in the event of default or sudden termination of obligations.
What happens to the advance if the agreement is not fulfilled? They just return it. The party through whose fault the transaction did not take place does not suffer any financial losses. Except for those situations where a previously signed agreement includes a clause regarding the presence of fines.
If the transaction does not take place due to the fault of the customer or buyer, then the entire amount of the previously transferred deposit remains with the contractor or seller. A similar rule is true in the opposite direction. If the agreement did not take place due to the fault of the contractor, he will have to return the entire amount of the deposit in double amount. This is a significant difference from an advance payment.
The deposit performs a security function. That is, it obliges both parties to fulfill the contract and provides each of them with guarantees in case of violation of agreements. This is why it is important to clearly understand the difference between an advance payment, an advance payment, and a deposit. For some, legal illiteracy results in unpleasant financial losses.
Possibility of refund of prepayment
In accordance with the Law “On the Protection of Consumer Rights,” retail establishments are required to return the prepayment in full at the buyer’s request. These terms and conditions may be subject to change if an amended contract is entered into regarding this matter.
If you change your mind about buying a product, you can return the prepayment in several ways:
- Termination of the contract, purchase and sale, where all the conditions for the possible return of the goods are specified.
- Submitting an application or complaint for a refund if the retail outlet refuses to do so voluntarily.
In addition, there are certain circumstances in which the prepayment refund procedure is necessary:
- inconsistency in the quality of purchased products;
- delay in delivery of purchased goods;
- delay in the expected production date;
- receipt by the buyer of other products;
- delay in the expected delivery time of goods.
In case of delay in delivery of products, the buyer has the right to demand that the seller pay a penalty. Its size is 0.5 - 1% for each day of delay.
In most cases in 2021, stores that care about their reputation will satisfy their claims.
It is important to consider that the claim is an important document and may affect the refund of the prepayment. This is due to the fact that trade institutions face penalties for failure to comply with legal regulations.
Is it worth it to do without documents?
By law, the transfer of an advance payment or deposit must be documented. Otherwise, one can only rely on the honesty of the other party. It is curious that in such transactions the greater risk falls on the customer or client, in other words. The seller or executor, receiving a deposit or advance payment, can appropriate the transferred amount of money without any consequences. After all, it is very difficult to prove the fact of receiving an advance in the absence of relevant documents. When refusing to formalize a written agreement, think carefully about whether you are ready for such risks.
It is worth noting that documenting the transfer of a deposit or prepayment is not at all difficult. The agreement can be made in writing. However, it must contain the correct amount, as well as information about the parties to the transaction. You also need to indicate the deadlines for fulfilling obligations and secure the transfer of funds with the signatures of each party. If we are talking about an advance, it is allowed to draw up a unilateral receipt from the receiving party.
Deposit
Let's move on to the second type of prepayment. A deposit is a sum of money that is transferred to one of the parties to confirm their intentions and become a guarantor in the transaction. This is referred to in Art. 380 Civil Code of the Russian Federation. The deposit performs several functions at once:
- Acts as a guarantor. If the contract is terminated or the terms of the contract are not observed, one of the parties will receive the entire deposit. This is a kind of compensation.
- Payment. At the end of the transaction, the deposit will act as an advance payment and will become part of the total amount of the contract.
- Acts as evidence. The deposited amount indicates that the parties are ready to fulfill their obligations and this will become one of the proofs of the transaction.
Making a deposit means that the buyer is interested in fulfilling the contract. For example, he is completely satisfied with the apartment - not a corner apartment, with an improved layout, with a large balcony, close to his place of work or a bus stop. Looking for another property is simply not advisable.
What to choose?
When concluding a deal, it is common for every person to have doubts. In this case, the confusion is associated with the choice between prepayment, advance payment and deposit. As you remember, there is no fundamental difference between the first two terms. However, a slightly different situation is observed with the deposit. The presence of an appropriate agreement is considered confirmation of the concluded contract.
If there is any doubt that the transferred funds are a deposit, then they will be considered an advance with the corresponding consequences. A similar situation occurs if the form of the agreement is violated when registering a deposit.
What consequences will become apparent in case of failure to fulfill obligations regarding prepayment?
If the obligations for which an advance payment has been made are not fulfilled, the consequences may be as follows:
- If the buyer does not fulfill the obligation to pre-pay for the goods or services, the seller has the right to suspend his obligations to transfer the goods or refuse to perform the service.
- If the seller receives an advance payment and does not transfer the goods within the prescribed period, the buyer may demand the transfer of the goods or the return of the advance payment for the goods that the seller did not transfer.
- If the seller does not fulfill the obligation to transfer goods that have been paid in advance, interest for the use of someone else’s money will increase by the amount of the advance payment.
When concluding an agreement, the entrepreneur can decide for himself how to secure the obligations.
Advance payment scam
Purchasing a product or service via the Internet with prepayment implies a mandatory return of the deposited amount in accordance with the rules of distance trading.
But the anonymity of sellers and buyers increases the risk of advance payment fraud. Common sense and an understanding of the basic operating patterns of scammers will help protect yourself from fraudulent schemes.
Prepayment of goods in advance is a common practice of online stores. The main goal of scammers is to force buyers to pay for a non-existent product.
Unscrupulous sellers may justify the need to receive an advance payment due to the urgency of the sale or the impossibility of meeting the seller to pay in cash.
It is worth paying attention that, unlike real online stores that exist, scammers do not provide clients with real contact information, sales contracts or other official documents that confirm the transaction.
If, during communication with the seller, the buyer has doubts about the quality of the product, its price is significantly lower than similar offers on the site, it is better to refuse the purchase.
How not to lose your money when purchasing goods remotely with prepayment
To avoid financial losses due to scammers, you can:
- Agree with the seller to pay for the goods by cash on delivery upon receipt of the order from the transport company.
- Ask the seller to take photographs of the product from different angles while communicating on Skype.
- Check the seller through customer reviews.
- Do not transfer money to your mobile phone. In most cases, this scheme is used by scammers.
Thus, when purchasing any product, people are often faced with the need to make an advance payment to confirm financial obligations.
After making the deposit, the buyer may refuse the goods without any valid reasons . The retail outlet is obliged to satisfy the client’s request, unless otherwise specified in the terms of the contract.
Each entrepreneur can independently decide on ways to secure obligations.
