Most automobile sale and title transactions are straightforward, and the deal can often be closed between the buyer and seller without involving a third party. Occasionally, however, special circumstances require a buyer and seller to use an escrow service to ensure that all of the terms of the sales agreement are met and all liens are paid off.
Lawyers operate escrow accounts, but typically do not escrow car title transactions because of the short-term nature of auto title transactions. Lawyers have certain obligations pertaining to the administration of escrow accounts and face disbarment if they do not handle these accounts correctly and distribute funds to the people who are supposed to have the funds once the transaction is complete.
If a title transaction involves the sale of a car with a bank lien against the title, the bank or finance company may act as an escrow agent between the buyer and seller. The lien holder has its own interests at stake because it wants to ensure that the lien is paid off. A bank will accept a check from the purchaser and verify that the funds are available and the money received. At that time, it will release the lien on the title, giving clean title to the buyer, and pay the seller any money remaining from the proceeds after the lien payoff.
A car dealer may act as an escrow agent when a vehicle is traded in -- particularly when the trade-in vehicle has a lien against it. The car dealer calculates the equity available in the trade-in and pays off the loan balance. This payoff is added to the new car purchase price minus the trade-in value. If a new car loan is involved, the dealer takes care of the funding for the loan as well, making sure all of the money is allocated correctly. While the dealer is processing these transactions, it is operating as an escrow agent.
When you are purchasing a vehicle online -- particularly through an auction site -- an escrow company can provide protection against fraud. A buyer sends money to the escrow company, which verifies the funds. The seller ships the car and when the buyer accepts delivery the escrow company pays the seller.
Escrows with Fraudulent Transactions
Fake escrow services are often used with fraudulent transactions. A person may pretend to sell a vehicle and may want to conduct the sale through a certain escrow company. This preferred company could be fraudulent and may run off with the buyer's money without ensuring delivery of the vehicle. A buyer should always choose a reputable escrow company without input from the seller.