Escrow System in Car Purchasing is the Need of the Day

‘New car launch events’ in Pakistan have become too predictable aren’t they? An assembler launches a car at a certain price, people rush to book the car in the early hours of the very first day only to find all units have been booked. They get delivery dates after several weeks, maybe even after couple of months, else they need to pay own money/ premium for quicker deliveries.

Assemblers then slows down the production of car citing supply-chain issues, which has emerged as a blessing in disguise for these companies. The demand increases, the delays elevates the premium money by ten folds, assemblers then announce a price revision which is implemented on all previous bookings. Not to mention the partial payment collected from thousands of customers (which is in several millions), is already earning them bulk loads of bank profits.

Related: The Sufferings of “Booking Open”… Is Pakistani Auto Consumer Protected?

By the time the delivery date arrives, customers will have to bear the price difference and they end up paying a lot more than the actual advertised price of that car at the time of launch. And guess what? Similar situation just got repeated with the launch of new HR-V in Pakistan.

Battling with import restrictions imposed by the State Bank and the global supply-chain issues which has hampered the production of new HR-V in Japan due to which many markets including Philippines have informed the customers to switch to other vehicles instead of ‘waiting’ for the HR-V, Honda Atlas decided to launch the crossover in Pakistan and committed to deliver the early-booked units between November 2022 and January 2023.

Related: Honda Will Now Deliver HR-V in June 2023- Not January!

However as soon as the booking was made, customers were informed that the delivery date has been pushed back to June 2023. A lot of customers have shown displeasure on social media regarding this practice of Honda, if the company was not in a position to deliver the car, there was no need to ‘launch’ and collect hefty amount in the name of bookings.

consumer trap made

With no government monitoring or regulations on the auto sector, assemblers can always get away with this practice and customers will keep suffering every time a new vehicle is ‘launched’ in the country. However if the govt authorities are serious to curb this situation & implement something that benefits the end consumers, they can consider introducing the ‘escrow’ mechanism which will make the booking procedure much transparent.

What is Escrow?

Escrow is a legal concept describing a financial agreement whereby an asset or money is held by a third party on behalf of two other parties that are in the process of completing a transaction. Escrow accounts are usually managed by the escrow agent. The agent releases the funds only upon the fulfillment of predetermined contractual obligations. Money, securities, funds, and other assets can all be held in escrow.

Key Takeaways

  • Escrow refers to a neutral third party holding assets or funds before they are transferred from one party in a transaction to another.
  • The third party holds the funds until both buyer and seller have fulfilled their contractual requirements.
  • Besides purchasing many expensive things such as property, or gold etc, Escrow is also used to buy cars (generally used ones) in many markets across the globe.

Consider a company that is selling automobiles. That company requires assurance that it will receive payment when the vehicle reaches the destination & is being delivered to the customer. The buyer, is prepared to pay for the vehicle only if it arrives in good condition.

Related: Policymakers’ Love With the On-Money Devil

The buyer can place the funds in escrow with an agent with instructions to disburse them to the company once the vehicle arrives & buyer is satisfied with everything. This way, both parties are protected and the transaction can proceed.

Similarly in some cases, a partial payment or deposit may also be made using automobile escrow. This might be done to reserve/ book the car for a potential buyer. The remainder of the purchase price is added to the escrow account before delivery. However if the buyer chooses not to buy the car, they get their deposit back. Of course there is a certain fee for using an escrow service but its peanuts considering the additional price customers need to pay in today’s circumstances.

Related: The Magnuson–Moss Warranty Act

Its like killing two birds with one stone. While assemblers will be sure of the bookings they receive, they cannot use those funds to earn unjust bank profits. It will also motivate them for ensuring proper quality control checks as a defective vehicle won’t release them the escrow funds. Secondly it will also eliminate the investors/ hoarders from the equation as only genuine buyers will be the ones using the escrow method. Since these hoarders are generally hidden from the documentations and using a transparent escrow service will reveal their identities which they would never want.

But we do know these measures won’t make it to implementations since it requires the govt authorities to put the bell on the big cat. Something which perhaps looks far from happening.

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