Let’s say that you have a check, but for one reason or another, you want to take that money and pay it to someone else. You could cash the check and then hand over the cash — or you could save yourself some trouble and simply sign over the check to the person you want to pay. You can endorse your check and sign it over to that someone else, and then they can cash or deposit the check. Here’s how and when it’s a good choice to sign a check over to someone else.
When to Create a Third Party Check
It’s your lucky day! You open a greeting card from Grandma and there along with the touching Hallmark sentiment is a rectangular piece of paper bearing the magic words “Pay to the order of: You!” On the lower right is Grandma’s distinctive flowery signature. Your sweet Grandmother has sent you a check for 50 bucks.
Fifty bucks, exactly the amount you owe your best friend for fronting the money to buy those concert tickets. Now you can pay your friend back right away. But how should you go about it? Should you deposit your check with your bank’s mobile app then go to an ATM and withdraw the cash? Or write your friend a check? Or go to the bank or other check cashing place, cash the check and then give your friend the money? So many choices. Maybe you could skip all those steps and sign Grandma’s check directly over to your friend.
This last scenario is actually a possibility. You could endorse the check to your friend, thereby creating what’s known as a third party check. The “third” in third party refers to the person who will ultimately benefit from the check. Think of it this way; party 1 is the writer of the check (Grandma); party 2 is the original recipient (you); party 3 is the person who actually receives the money (your friend).
Third party checks are a lot less common than they used to be, and now days, you’ll typically only find them in a few instances. For example, auto insurance companies will usually pay out a claim in the form of a check made out to you. You are then expected to endorse the check over to the mechanic who repaired your car. However, using third party checks to settle private debts, such as the one between you and your friend for the concert tickets is rare.
Increased security measures surrounding the transfer of money between people and financial institutions has made it harder to use third party checks in daily situations. To understand why, we’ll discuss what a check actually is and what the signatures on it (endorsements) really imply.
A Warning About Third Party Checks
Once you endorse a check, whoever finds it can cash it themselves. Though whoever cashes the check needs to show an ID (and since they won’t have yours, they shouldn’t be able to cash it), it’s best not to take the risk of endorsing ahead of time. Wait until you’re at the bank to endorse your check. When signing over a check to someone else, make sure you endorse it and sign it over to them right away, rather than endorsing it and later getting around to signing it over to them.
Another thing to know about third party checks before you create one is that they can be tough to cash or deposit. Many of the places that usually cash personal checks won’t take third party checks because of the higher amount of risk involved. Some banks won’t even let you deposit them. See our article listing places to cash a third party check to find out ahead of time whether you’ll be able to cash it.
How to Sign over a Check to Someone Else
Here’s how to sign over a check to someone else… When you receive a check that you want to sign over to a third party, instead of just signing your name on the back, first write “pay to the order of” followed by the third party’s name. Then you sign your name below that. It’s as simple as that.
According to the Uniform Commercial Code, a series of laws pertaining to commercial transactions in the U.S., the signature in this case serves as a warranty. You are telling not just the person you’re giving the check to, but also that bank that cashes it that the check is valid and unaltered. The UCC was first adopted back in 1952, and though it has been updated to reflect electronic transactions and other technology, in this day of heightened financial security and more demanding laws regarding money laundering and bank transparency, banks won’t consider your signature an iron clad guaranty.
Where to Cash or Deposit a Third Party Check
Before you create a third party check, you should make sure the recipient will be able to cash it. It’s not easy to find a place where you can cash a third party check because of the higher rate of risk associated with them. When it comes to cashing, you can pretty much rule out all grocery stores and other retail locations that cash some types of checks. That leaves banks, credit unions, and check cashing stores.
Third party checks can definitely be a hassle. If someone offers to endorse a check to you it’s better to ask that they deposit the check into their account and pay you in cash or write their own check to you later. You should probably do the same when you are the one who owes someone money. But if you get a check, say an insurance check, and need to sign it over to someone else and they know how much of a hassle it can be to get it cashed, go for it.