What is a Bank Draft?
A bank draft is a payment instrument that is guaranteed by a bank. It is a check drawn by a bank on its own funds, payable to a specific payee.
How Does a Bank Draft Work?
- Application: The applicant (the person or entity requesting the draft) goes to a bank and fills out an application for a bank draft.
- Payment: The applicant pays the bank the full amount of the draft, plus any applicable fees.
- Draft Issuance: The bank then issues the draft, which is a check signed by a bank official and payable to the designated payee.
- Payment Processing: The payee can then deposit the draft into their bank account or present it for payment at a bank.
Advantages of Using a Bank Draft:
- Guaranteed Payment: Since a bank draft is backed by the bank's own funds, it is a very secure and reliable form of payment.
- Increased Security: Bank drafts offer more security than personal checks because they are drawn on the bank's account, rather than the individual's.
- International Transactions: Bank drafts are often used for international transactions because they are recognized and accepted worldwide.
- Convenience: They can be used to pay for large purchases or to send money to someone who doesn't have a bank account.
Disadvantages of Using a Bank Draft:
- Fees: Banks typically charge a fee for issuing a bank draft.
- Limited Availability: Not all banks offer bank drafts, and the availability may vary depending on the bank.
- Time Consuming: It can take a few days to obtain a bank draft, so they may not be suitable for urgent payments.
Bank Draft vs. Wire Transfer:
Bank drafts and wire transfers are both secure payment methods. Here's a comparison:
| Feature | Bank Draft | Wire Transfer |
|---|---|---|
| Speed: | Slower | Faster |
| Cost: | Usually less expensive | Usually more expensive |
| Security: | High | High |
| Traceability: | More traceable | Easier to trace |
When to Use a Bank Draft:
Bank drafts are a good option for:
- Making large purchases
- Sending money internationally
- Paying for a business transaction
- Making payments where a personal check may not be acceptable
While bank drafts offer a secure and reliable payment method, they may not always be the most convenient option, depending on the situation.