bank draft definition 9

BANK DRAFT Definition & Meaning

The purchaser may also be required to pay a fee for the replacement draft. Despite these inconveniences, the ability to stop payment and obtain a replacement provides a safety net for users, preserving the utility and trustworthiness of bank drafts as a payment instrument. A bank draft or banker’s draft is a check that it guaranteed by the bank that issues it. This term is more commonly used in the UK than it is in the US, where a cashier’s check is a similar, more common method of guaranteed payment. One disadvantage of using a banker’s draft is that it may involve fees, making it more expensive than issuing a personal check.

How to Cash a Bank Draft

A bank draft, also known as a banker’s draft or a bank draft definition cashier’s check, is a financial instrument issued by a bank on behalf of a customer. It serves as a secure method of payment, especially in situations where the payee requires a guaranteed form of payment. Bank drafts are commonly used for large transactions, real estate transactions, or in situations where the payee may not accept personal checks due to concerns about the check bouncing.

This makes demand drafts a preferred method for sending guaranteed funds to a recipient who may not have immediate access to the issuing bank. They are often used for settling bills, making purchases, or sending remittances. Most of the time, bank drafts are used by people who need to make large payments. Someone might need to use one to put down a deposit on a house, for example, or to pay for a car bought directly from a private seller.

The person who requests the draft is usually charged a fee, set by the amount of the check. Many people find that the security of this type of payment is worth the cost, however, especially for one-time payments. Customers who must regularly purchase many bank drafts may be able to get a discount. If you’re cashing a bank draft, you’re in luck because bank drafts are guaranteed by the financial institution that issued them.

Fundamental Analysis: Principles, Types, and How to Use It

In such cases, the buyer can lose a lot of money, especially since bank drafts are generally used for larger purchases. A bank draft is difficult to cancel since the funds have already been withdrawn from the buyer’s account and transferred into the bank’s reserve account. However, if the bank can confirm that the bank draft has not been cashed out by the payee, it might agree to cancel the bank draft and refund the buyer’s account. First, the individual making the payment submits a request for a bank draft with their financial institution. Once the request is submitted, the bank reviews the individual’s account to see if he or she has sufficient funds to transfer. Most checks take several days before you receive funds in your account.

What is a bank draft in convertible currency?

The draft is then issued and handed to the client who will afterwards deliver it to the seller or recipient. Teller’s checks, sometimes referred to as bank drafts, are similar to cashier’s checks in that they are drawn on the bank’s funds and signed by a teller or bank officer. However, teller’s checks are typically used for bank-to-bank transactions or for clients within the same banking institution.

• They are often utilized for the settlement of escrow accounts, where a neutral third party holds the funds until the fulfillment of a condition, such as the closing of a real estate transaction.
• If the draft is for a very large amount, you may need to deposit it at the branch as it might not be accepted through the app.
• When a bank draft is issued, the issuing bank guarantees the payment, ensuring the recipient that the funds are already available.
• A great alternative to cheques with instant access to funds, no holds, and no risk of lost or stolen cheques.
• However, the international nature of these drafts introduces additional complexities.

They serve as an important alternative to cash or personal checks, especially in transactions requiring verified funds. Experts recommend caution when accepting a bank draft as payment, particularly during times when financial institutions are typically closed, such as on a Friday night or a weekend. Payment that is offered for goods before the potential buyer has even seen them should also be suspect. A potential buyer who shows up with a bank draft in hand on a Sunday morning to buy a car from a private seller without even asking to test drive the car is probably up to no good. Sellers should never accept a form of payment that seems questionable or that cannot be verified.

• If you are wondering how to cash a bank draft in Canada, the process is similar to how you cash a cheque – a bank draft can be deposited or cashed at your bank.
• The payee can typically take it to any bank and be given the amount of the check in cash.
• The person who requests the draft is usually charged a fee, set by the amount of the check.
• Over the years, we’ve refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills.
• Alternatively, you can purchase a money order even if you don’t have a bank account.

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To order a bank draft2, go to any RBC Royal Bank branch in Canada. Enoch Omololu, personal finance expert, author, and founder of Savvy New Canadians®, has written about money matters for over 10 years. Enoch has an MSc (Econ) degree in Finance and Investment Management from the University of Aberdeen Business School and has completed the Canadian Securities Course. Enoch is passionate about helping others win with their finances and recently created a practical investing course for beginners. Unlimited debits, online bill payments and Interac e-Transfer transactions.

Bank Drafts Explained: Definition, Process, and Benefits

When choosing which payment method to use, the main consideration is the amount of money you need to transfer. Bank drafts are generally recommended for big amounts, i.e., several thousand dollars. Another advantage of a bank draft is that it is a much easier and more convenient method for transferring a large sum of money than withdrawing a large sum of cash.

This means the bank, not the client, is ultimately liable for paying the specified amount to the beneficiary. Savvy New Canadians content is vigorously reviewed for accuracy by our team of qualified fact checkers. The content on this website includes links to our partners and we may receive compensation when you sign up, at no cost to you. This may impact which products or services we write about and where and how they appear on the site. It does not affect the objectivity of our evaluations or reviews.

Key Points About Using Bank Drafts

Unlike an e-transfer, a bank draft does not have a maximum amount limit and does not require the banking information of the payee. Thus, bank drafts are commonly used when making large purchases, such as buying a house or car. A wire transfer allows you to transfer money from one account to another. You’ll simply need the recipient’s banking data to make the transfer, though if you transfer funds between different financial institutions you’ll have to pay an additional fee. You can only purchase bank drafts from a financial institution like a bank or credit union. You can buy money orders from certified stores, post offices, and banks.

Learn their types, accounting treatment, and impact on financial statements. Statement verification is the process that ensures financial documents such as bank statements are accurate, authentic, and compliant. The sender then pays back the bank for the fully converted amount, plus fees and exchange rate spreads. Banks usually charge for drafts, which can be a flat fee or a percentage of the draft amount. They might waive this fee for loyal customers or high-net-worth individuals (HNWIs). The bank prepares the draft with your name and the payment amount to the payee.

The issuing bank will then take steps to prevent the draft from being cashed fraudulently. This process may involve the purchaser completing an indemnity agreement, which protects the bank in case the lost or stolen draft is presented for payment after the stop payment has been issued. A key advantage of bank drafts over personal checks is the “no bounce” feature. While checks can bounce if the payer’s account lacks sufficient funds, a bank draft is prepaid, meaning the bank has already collected the money from the payer before issuing the draft. This eliminates the risk of the payment being rejected due to insufficient funds.