Study material on Bank Draft

types of bank draft

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  • Bank drafts provide the person receiving the funds with a guarantee
    that they’re available.
  • Plus, you might be able to get more (or all) of the amount in cash immediately.
  • You then give or send the draft to the recipient, who can deposit or cash it as they would a cheque.
  • Keep in mind, however, that you’ll pay a fee each time you go through this process.
  • Banks charge a flat fee or a fee equal to a percentage of the draft total.

The term bank draft refers to a negotiable instrument that can be used as payment just like a check. Unlike a check, though, a bank draft is guaranteed by the issuing bank. Bank drafts, with their assurance that funds will be paid, are secure and convenient methods of payments for large and/or important transactions, both domestic and international.

What Is the Purpose of a Bank Draft?

The funds are still transferred from the customer’s account to the bank, which then issues the check on its own account. You have the option of making the deposit at the branch, through an ATM, or by using your financial institution’s app. 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. ACH payments likewise allow users to transfer funds between financial institutions.

But unlike personal checks, a draft is guaranteed by the issuing bank, with no chance that the check could bounce. 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.

Bank Draft: Definition, Meaning, vs Check, Example, Advantages and Disadvantages

No, there is no specific dollar amount to which you’re limited when requesting a bank draft. That’s an important reason why bank drafts are used for transactions involving large amounts of money. When you purchase a bank draft, your bank withdraws the funds from your account and places them in a reserve account. This guarantees the full amount is available for the person receiving the draft. A bank draft is a guaranteed payment option you can use to send large sums of money to a third party. If you change your mind and decide not to make the purchase or if the
seller cancels the sale, you can get a refund on your bank draft.

The bank customer issues a cheque and is not backed by any bank guarantee for honoring payment( i.e., chances of the cheque getting bounced due to varied reasons). Whereas Bank Drafts are issued and guaranteed by the bank, as in this case, the amount is pre-deposited by the customer. The bank issues it at the request of the bank customer to make large payments. Consumers have several avenues available when they need secure, certified payment options. They may require them to secure an apartment or for a deposit for a very large purchase.

Is There a Charge for a Bank Draft?

Today, this strategy is used for a large number of financial transactions. The company generating the banker’s acceptance would typically be an importer in a transaction where they’re concerned about sending money or payment before receiving goods. The importer would need a banker’s acceptance to make the exporter comfortable that they will be paid. A letter of credit is similar to a banker’s acceptance in that a bank will guarantee an exporter payment for goods or services in the event that payment isn’t made on time or for the right amount. But a letter of credit doesn’t work on a time draft function like a banker’s acceptance. There are several types of letters of credit, including commercial letters of credit, standby letters of credit, and revolving letters of credit.

types of bank draft

But a draft is backed by the customer’s bank, which has already withdrawn the necessary funds. This makes bank drafts a more reliable payment option than traditional checks. 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. 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.

Bank draft vs. money order

Keep in mind, however, that you’ll pay a fee each time you go through this process. And if you receive drafts from banks outside your network, fees can potentially be higher. In addition, a bank draft doesn’t need a customer’s signature but is signed by a bank official, enhancing security.

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If you’re a member of a credit union, you may be ale to get an official check form another credit union’s branch. Many credit unions tend to do shared branching since they are a much smaller network in comparison to larger banks. Although you can request drafts online, your best chances are if you go into a bank branch that you currently bank with. This is because they normally only provide this service to customers. The name of the person or entity you want to pay appears on the bank draft.

Certified Cheques

Banks may waive the fee for customers who have a good relationship with the institution or for those who are considered high-net-worth individuals (HNWIs). The money is transmitted through the bank to the recipient’s bank account, deducting a commission. This involves the transfer of a defined quantity from one location to another. For example, money orders are delivered from one location to another. It is also a financial tool, and the bank assumes responsibility for remitting the funds upon receipt of the order.

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Additionally, a bank draft is more secure than keeping a large amount of cash on hand. Many online banks allow you to deposit funds electronically, saving you a trip to a branch location. Some resources will use the term “bank draft” as a types of bank draft catch-all for automatic payment, such as those that occur through an Automated Clearing House (ACH) network. But while the mechanism behind these automatic payments can vary, bank drafts always follow the clear procedures outlined above.

Bank draft vs. cashier’s check

The second case is when the draft is fraudulent, and so was not actually prepared by a bank. For example, you will need to pay the full amount of the check, including fees, with cash or a debit card cash advance. Alternatively, you can always do what you need to do with a money order, which is available in multiple grocery and convenience stores. Your bank draft is irrevocable as soon as you hand it over in
payment. Even if you realize you’ve
been sold a lemon, you won’t be able to stop payment.

types of bank draft

Take it to your bank or credit union and endorse the back of the document. Your bank may credit the funds to your account more quickly if you make your deposit with a bank employee, as opposed to using an ATM or mobile device to deposit. Plus, you might be able to get more (or all) of the amount in cash immediately. Bank drafts are typically available for spending in the recipient’s account within one business day, and it’s unlikely that the bank can reverse the deposit a few days or weeks later. As a result, bank drafts are popular for things like international trade or purchasing a home. One of the benefits that make bank drafts a more suitable means of transaction is ease and convenience.

When a person write a check, they don’t necessarily need the fund available in their account to write it, which is why there are bounced checks. With Bank Drafts, you need the actual funds or cash to have it moved to the bank’s accounts immediately when the bank issues the draft. A bank draft, cashier’s check, and certified check are similarly guaranteed methods of payment, but do have some slight differences. The main distinction between these three types of payment are when the money is transferred and who is issuing the check.

It’s an instrument from a bank that promises to pay the holder a specified amount at a specified date, usually between 30 to 180 days. A company issues a banker’s acceptance that’s guaranteed by a commercial bank. Certain documents are required before a bank will guarantee a banker’s acceptance. A bank endorsement is a guarantee made by a bank that it will uphold a check or other negotiable instrument, such as a banker’s acceptance, from one of its customers. This assures any third party that the bank will back the obligations of the creator of the instrument in the event that the individual or entity cannot make payment.

Bank drafts are also commonly accepted forms of payment by certain businesses and government agencies. Banks charge a flat fee or a fee equal to a percentage of the draft total. However, a bank may waive the fee depending on a customer’s relationship with the bank or the type of account that they have. And unlike e-transfers, you don’t need the other person’s banking information.

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