Advance Payment vs. Deposit: Key Differences Explained

While the terms “advance payment” and “deposit” are often used interchangeably, they have distinct meanings and legal implications. Misunderstanding these differences can lead to costly mistakes. This article breaks down how each works and when they are used.

What is an Advance Payment?
An advance payment is a partial prepayment made by a customer to confirm their intention to buy a product or use a service at a future date. For the seller, it signals the buyer’s commitment to the transaction. However, the most important feature of an advance payment is that it is always refundable, even if the contract is not completed, regardless of fault.

According to “Article 410 § 2 of the Civil Code”, if the agreement falls through, the customer has the right to a refund. For example, if a student pays an advance to a language school but later finds a better offer and cancels, the school must return the full amount.

What is a Deposit?
A deposit serves as financial security for both parties to a contract, commonly used in industries prone to last-minute cancellations (e.g., beauty salons). It provides compensation if the contract is not honored. Under “Article 394 § 1 of the Civil Code”, if one party fails to fulfill the agreement, the other can retain the deposit or demand double its amount if they initially paid it.

For example, in real estate, a buyer might pay a deposit during the reservation stage of purchasing an apartment. If the buyer changes their mind, the seller keeps the deposit. However, if the seller fails to conclude the sale, they must return twice the deposit amount to the buyer.

Key Differences
– Advance Payment: Refundable regardless of fault.
– Deposit: Protects both parties; may be retained or doubled if the contract is not fulfilled.
In both cases, the amount is applied toward the final payment if the contract is completed. Understanding these differences ensures smoother transactions and avoids financial misunderstandings.