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What Is The Difference Between A Down Payment And A Deposit? Secure Your Interests!

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It is impossible to hide that we are constantly thinking about earning and saving money. Less often about the negligence and leakage of the household budget, from which small amounts are escaping each day. We do not think about the consequences of distinguishing specific expressions in the contract. However, the devil is in the details! Most of us use the terms ‘advance’ and ‘down payment’ as synonyms for securing a contract for a product or service. Despite the common goal – the differences between them are diametric! Here are the most important of them, from the point of view of the consumer.  

 

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First of all – the down payment is not a down payment!  

Both prepayment and advance payment is a popular form of prepayment among consumers. Most often, we will meet with them in a situation – when plans to purchase a given item are put off in time. We can use them in various circumstances, for example when signing a preliminary contract for the purchase of a flat, car or plot – and even when booking a hotel. Then, in order to be sure of buying and completing the service – the customer pays part of the required sum. In turn, for the entrepreneur it is a signal that he has a buyer of his own intentions, who will not withdraw from cooperation. If the down payment and the down payment are so similar to each other then it is worth taking care of anything? Of course! Knowing the details will allow you to better protect your interests even better, thanks to a properly signed contract.

Deposit – secure business with interest!  

So, if in accordance with the provisions of the contract you pay a deposit in order to obtain some thing or service, but … In the meantime, for various reasons, you give up on it, the seller is not obliged to pay the money you have previously invested. The Office of Competition and Consumer Protection clearly emphasizes that the down payment may be non-returnable! At the same time, it reserves that its amount can not amount to the total amount of the subject of the contract. That is why it oscillates around 10-20 percent. full value. What is important – to make the deposit really a deposit must be clearly stated in the contract! Otherwise, every prepayment is treated as an advance payment!

The exact meaning of the deposit is specified in the Civil Code. Article 394 states that:  

1. In the absence of a different contractual reservation or the custom of the deposit when entering into a contract, it is important that if the contract is not executed by one of the parties, the other party may withdraw without a deadline and save it, and if it has itself, may demand twice the amount.

§ 2. In the event of performance of the contract, the down payment shall be credited towards the benefit of the party that provided it; If credit is not possible, the deposit is refunded.

§ 3. In the event of termination of the contract , the advance payment should be returned, and the obligation to pay a sum that is twice as high shall be excluded. The same applies to an accident when the failure to perform the contract occurred as a result of circumstances for which neither party is responsible or for which both parties are responsible,

 

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Deposit – it’s not all!  

In addition to the fact that the down payment is a form of securing the preliminary contract, it is worth knowing what is happening to it when all the contractual provisions will not come to fruition.

  • In the case when the deposit took the form of money, it is credited towards the price. Which means that it covers part of the costs for a given item or service,  
  • In turn, when the down payment has taken a non-financial form, it returns! Then the buyer after obtaining a specific item – must pay the entire service fee.  

What if the contract was broken by one of the parties?

  • If the contract is not executed due to the fault of the buyer – who will change his mind and will not want to keep his terms, the amount paid is not refundable!  
  • If the contract is not executed due to the fault of the seller – because he withdraws from it for little compelling reasons, the buyer has the right to receive a deposit, even twice the amount paid!  
  • In the event of termination of the contract with the consent of both parties – the down payment must be returned to the seller – but the right to receive a sum that is twice as large is eliminated,  
  • Similarly, if the contract is terminated by the court or the buyer and the seller as a result of randomly independent reasons, e.g. the theft of the car being the subject of sale or the fire of a hotel room. The buyer also then has the right to a refund of the deposit – but only the amount paid (not twice as high)!  

The legal basis in each of the above situations is art. 494 of the Civil Code , which emphasizes that § 1. A party that withdraws from a reciprocal contract is obliged to return to the other party everything received from it under the contract and the other party is obliged to accept it. The party who withdraws from the contract may demand not only the return of what it has provided, but also on the general principles of remedying the damage resulting from the default.
§ 2. The return of the benefit to the consumer should take place immediately 2 .  

Most often, the down payment is returned within the period specified in the contract!

Limitation of the down payment – what are the rules saying?  

It is also worth mentioning the issue of the limitation of the advance – to which the provisions of art. 118 of the Civil Code 3 . According to them, as in the case of other claims,   the period of limitation is six years, and for claims for periodic benefits and claims related to running a business – three years. However, the end of the limitation period falls on the last day of the calendar year, unless the limitation period is less than two years 4 .

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The advance does not secure the preliminary contract !  

What distinguishes the “sister” equivalent of a down payment at first glance? Simply put – the advance payment is not subject to any provisions of the Civil Code. In addition – it is also not disciplinary! It is nothing more than paying part of the amount for completing a specific service or purchasing a specific item. In contrast to a deposit that can take a financial and non-financial form – the advance payment is paid in cash only!  

What happens to the advance payment if the contract is finalized?

  • The advance payment is treated as a form of payment which is paid in advance for future benefits resulting from the concluded contract. And unlike a deposit, it is not a form of securing the contract, but only part of the price! This means that the buyer must pay only the sum, which is the difference between the advance paid and the total sum of the subject of the contract.  

What if one of the parties breaks the contract?

  • However, if the contract for various reasons will not be made – the advance must be returned to the payer! In such cases, the law does not differentiate between situations in which the agreement was broken by the fault of the seller or the buyer or as a result of other random causes – the advance payment is always refundable!

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Deposit and advance – what’s better?  

In the light of the arguments presented, many of us are certainly asking ourselves the question: deposit or advance – what to choose? Unfortunately – this question has no unambiguous answer. It all depends on the circumstances and the situation. Therefore, before signing a contract it is worth determining what is a priority for each party. At first glance, a down payment is more beneficial for the seller and advance payment for the customer. However, this logic does not always work! Here are three different scenarios:

  • If the seller is not sure about the sale of the goods, then it is a good solution to make an advance payment. Choosing a deposit can cause that when withdrawing from the transaction – will be forced to pay even twice the amount paid by the client,  
  • If the buyer is not sure of the intention of the seller should strive to sign a deposit! Why? Well – in the event of failure to comply with the terms of the contract – the seller will have to pay not only the amount paid, but also compensation for losses incurred by the future buyer,  
  • An advance is a good form of solution with good partner relations. Then, when both parties honestly analyze the terms of the contract, they comply with their performance and allow the possibility of resignation of one of the partners.  

So if you have used the term “down payment” and “advance” so far, you already know that these are not synonyms. And two separate ways to “secure” your interests! Both solutions have different effects when the contract is not finalized. The down payment can be used as compensation and compensation. On the other hand, an advance payment – is a classic prepayment method, which returns to the buyer in the same amount in which it was paid. Therefore, one should be careful about the choice of the right words in a written agreement – that the function to be performed by the “down payment” and the “advance payment” is actual with their original action.

 

 

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