12/23/2022
The use of escrow accounts is becoming more and more widespread, it is very likely that on several occasions you have heard its name or you have been asked for it when paying for an important purchase.
If so, but you do not fully understand what it is about, this post is to clarify all the doubts about this type of account.
What is an escrow account?
Simply put, it's an account managed by an impartial third party that holds funds during a transaction. In other words, it serves as an intermediary escrow service to prevent any exchange-related fraud or scams from occurring.
Although it is used for large value transactions, it is also available for smaller amounts. Escrow accounts have been around for several years, but their usefulness was confined to the commercial and financial sectors.
This type of escrow fund is very common in the U.S. and other countries to hold money related to mortgage loans payments. It is also used in corporate acquisitions and mergers, major business deals and more.
With the advent of the Internet, the disruption of other technologies and the rise of the digital economy, the escrow account is now more widespread.
It functions as a space that facilitates a secure exchange between parties. This has become common when buying stocks, assets, funds and even in currency exchanges or cryptos.
It is important to know that setting up an escrow account is not simple and requires certain computer resources that not all of us have.
For this reason, there are platforms that offer this kind of service or there are websites that apply this system organically to facilitate transactions between their users.
4 common instances to use an escrow account
Nowadays, with the economic growth and the increased flow of transactions, the escrow account sounds like a logical and necessary solution. Taking its background and adding other situations, it is frequently used to:
- Purchasing goods and services. The escrow account can be applied in any buying or selling situation. Its role is to serve as an arbitrator who ensures that those involved comply with the terms set forth.
- Assist landlords and tenants. These relationships are often complicated and an impartial intermediary can be very helpful. In this case, it lends itself to protecting the interests of both in the resolution of a financial dispute.
- House purchase. With so much money involved, this escrow fund is a practical solution in purchase and sale transactions. As long as everything is in a neutral place, the parties can rest assured that their interests are protected.
- Make monthly mortgage payments. Although not as common as a straight discount, this one-off situation has its practical side. Homeowners can use an escrow account in order to set aside money they don't want to spend on other things.
Importance of involving an intermediary
Since most transactions between individuals and businesses occur at a distance, it is necessary to rely on a reliable system to make these exchanges.
Escrow also arises from a growing culture of fraud on the Internet. Hence, this digital process has greater adoption among stakeholders.
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In this sense, the buyer is concerned about his investment and the reception of the products or services as expected. The same happens with the seller, who wants to be sure that he has been paid what he agreed.
This is solved with the escrow account, which facilitates secure digital transactions.
How does an escrow account work?
The way it works couldn't be simpler and clearer:
The buyer can place funds in an escrow account that is part of a platform managed by someone else. This third party releases the money to the seller only when the conditions defined in the agreement between the two parties are met.
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The one who receives the funds cannot withdraw them from this escrow if the agreed conditions are not met.
This intermediary solves any trust problem for different operations, especially when there is a lot of money at stake. It is a way to combat the climate of distrust between buyers and sellers.
On the other hand, an escrow account has a clearly defined timeline that eliminates speculation. Through it, those involved can follow the movement of money and the progress of the deal. Since this process is overseen by experts who favor no one, there is less to worry about.
In addition to combating fraud, escrow accounts are helpful in sectors such as automobiles, law and intellectual property.
Entrepreneurs, new businesses and startups can leverage this system to minimize the risk related to their most critical operations, such as supply chain, procurement, professional services, etc...
The escrow account can be a practical solution to end the problems of distrust between buyers and sellers. In an increasingly fast-paced, fast-changing and digitized world, these platforms have been adapting to meet the need to cultivate long-lasting relationships.
Español: ¿Qué es una cuenta escrow y cómo funciona?