Get to know what a bank draft is and how it works!
Nowadays many financial transactions can happen in a matter of seconds and with only a few touches on a phone screen. But for some situations, where there’s a large amount of money involved and limited solutions, and you want a guaranteed form of payment, a more reliable and safer method might be required. This is where a bank draft might come in.
Let’s explore what it is, how it works and what are the advantages and disadvantages of it. Also, if you want to check out more financial tips on our website, you can click on this link!
What is a Bank Draft?
A bank draft is a guaranteed form of payment issued by your bank. It’s essentially a pre-paid check where the funds are verified and withdrawn from your account upfront. The bank makes sure the recipient (third party) will receive the full amount, unlike a personal check that can bounce if there aren’t sufficient funds, making it a safer way for the third party to recieve said money. That’s why it’s a great choice when dealing with sums of money.
For example, when renovating your home, some contractors might not accept credit cards or cheques as a form of payment and instead prefer a bank draft, because the funds are assured. Bank drafts can be deposited at a bank or credit union, either at the branch, through an ATM, or by using your financial institution’s app.
When should I use one?
Here are some common examples:
- Real Estate Transactions: when making a down payment on a house or property, it might be preferred by sellers to ensure immediate access to the funds;
- Large Purchases: for high-value purchases like cars or jewelry, it can be a secure way to finalize the transaction;
- Sending Money Securely: if you need to send money to someone you don’t know well, or if it’s going overseas, it offers a safer alternative to a personal check.
How Does a Bank Draft Work?
Here’s how to obtain and use a bank draft:
- Request a Bank Draft: visit your bank branch or, if available, request it online or by phone (especially with digital banks);
- Provide Details: specify the recipient’s name, the amount of the payment, and any additional memo information;
- Pay the Fees: there will be a processing fee associated with obtaining it;
- Funds Withdrawn: the bank deducts the draft amount and any fees from your account immediately;
- Receive the Draft: you’ll be given a signed bank draft with pre-printed information like the recipient’s name, amount, and a unique draft number;
- Deliver the Draft: provide the bank draft to the payee (the person or entity you’re paying);
- Deposit or Cash: the recipient can deposit the bank draft into their account or cash it at their bank.
How much does it cost?
Certain accounts or banking packages allow you to get free bank drafts, but some will charge you for one. The cost depends on the type of account you have. Some accounts charge a monthly fee and the cost of drafts is included in that fee.
Pros vs Cons of using a Bank Draft
| ✔️ – PROS | ❌ – CONS |
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Guaranteed Payment: it ensures the recipient receives the funds. This makes it a safer option for high-value transactions like down payments on a car or house |
Fees: banks charge processing fees for issuing bank drafts, which can be higher than check fees |
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Secure: bank drafts are more difficult to counterfeit compared to personal checks |
Processing Time: obtaining a bank draft might take longer compared to writing a check, especially if you don’t have online or phone banking options |
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Traceable: the unique draft number allows for easier tracking and verification of the transaction |
Specificity: a bank draft is pre-printed for a specific recipient and amount. You can’t change these details after it’s issued |
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Convenience: bank drafts can be a good alternative to carrying large amounts of cash, especially for transactions where cash isn’t accepted. You can also get a bank draft in different currencies |
Lost or Stolen Drafts: a lost or stolen bank draft can be a hassle to replace, requiring you to work with your bank to stop payment and potentially obtain a new one. And that can cost you money |
What are the alternatives to Bank Drafts?
There might be situations where other payment methods are more suitable according to your needs. Here are some alternatives to consider:
- Wire Transfers: for fast and secure electronic transfers, though they typically come with higher fees;
- Certified Checks: similar to bank drafts, certified checks guarantee the funds are available. However, the verification process might take longer and the fees are higher;
- Money Order: gives you the option to cancel or stop it as long as it hasn’t been cashed. But tends to limit the amount of money and it may only be available in a limited number of currencies.