How Does an Escrow Service Work When Buying and Selling a Car?

Buying a used car this year can be tricky with the drastic price increases and inventory shortages at dealerships. In order to circumvent the shortage and price hike, many used car buyers are turning toward the private party classifieds to find their next cars and possibly save some money. However, buying a car from a private party can come with a lot of mistrust and some transaction issues. In those cases, an escrow service can help.

What is an escrow service?

A car salesperson shows a customer the car lot.
A car salesperson shows a customer the car lot. | (Photo credit should read EZEQUIEL BECERRA/AFP via Getty Images)

When you think of the word “escrow,” you probably think about mortgages and buying a home. However, the same term applies to car buying. Carchex reports that an escrow service is mainly an account that’s not owned by the buyer or seller of the car, but it protects both parties that are involved in an agreement.

Before the title for the car is transferred, the buyer puts the money into the escrow account instead of paying the seller directly. This will allow the money to be protected until the paperwork is signed over. The Better Business Bureau notes that escrow creates a safe environment where the buyer and seller feel comfortable exchanging money for goods.

When is an escrow service used?

A customer at the Fresh Auto car dealership.
A customer at the Fresh Auto car dealership. | (Photo by Valery Sharifulin\TASS via Getty Images)

While you might not need to use an escrow service for every private party used car sale, it can come in handy in unique buying and selling situations. Edmunds reports that if a vehicle is being sold remotely, then an escrow service can facilitate the transaction. In that case, the escrow service will verify that the funds are paid and then transfers them to the seller.

Additionally, if you’re selling a car that still has a lien on it, then the buyer can put the money into an escrow account until the seller has the title to the car in hand. Kelley Blue Book notes that this is a great way to ensure that the buyer “won’t part with his or her money until the title has been released by the lienholder.” Although, bear in mind that some buyers may not want to use an escrow service as there are fees associated with doing so.

How does the escrow service work?

A client looks at a used car for sale at the AGAT Profi dealership.
A client looks at a used car for sale at the AGAT Profi dealership. | Dmitry Rogulin/TASS (Photo by Dmitry Rogulin\TASS via Getty Images)

Using an escrow service is a relatively simple process. First, the buyer and seller agree to the terms including shipping terms and other fees. Then, both parties can sign up for an escrow service and the buyer will submit their funds into the escrow account.

Once the escrow service verifies that the funds are cleared, it notifies the seller. After which, the seller is now able to ship the car to the buyer. When the buyer received the vehicle, they have a few days to look over the car and make sure it arrived as agreed from the start. After the buyer notifies the escrow service that they have received the car, the funds get released to the seller.

Just think of the escrow service as a “trustworthy middle man” between both parties. As far as the aforementioned fees go, escrow services like Escrow.com charge a small percentage of the vehicle amount for using its services. And while it does cost a little more money to use, paying for an escrow service is a small price to pay for a transaction that could lead to a massive headache and a lot more money spent.

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