bank draft definition

2 min read 01-11-2024
bank draft definition

Bank Draft Definition

A bank draft, also known as a demand draft or teller's check, is a payment instrument issued by a bank on behalf of a customer. It's essentially a check guaranteed by the bank, ensuring the recipient will receive payment.

How does a bank draft work?

  1. The customer requests a bank draft: The customer provides the bank with the amount they want to pay and the name of the payee (the person or entity receiving the payment).
  2. The bank issues the draft: The bank will deduct the amount from the customer's account and issue a check drawn on its own funds. This check is then payable to the payee.
  3. The payee presents the draft: The payee can present the bank draft to their own bank to deposit the funds or cash it at the issuing bank.

Why use a bank draft?

  • Guaranteed payment: The bank's guarantee ensures the payee will receive the funds, providing a higher level of security compared to a personal check.
  • Enhanced trust: Bank drafts can build trust in transactions, especially when dealing with parties unfamiliar to each other.
  • Convenience: They offer a convenient way to make large payments, avoiding the need to send cash or a personal check.

Key features of a bank draft:

  • Drawn on a bank's funds: This distinguishes it from a personal check, where the individual is responsible for the payment.
  • Guaranteed by the bank: The bank guarantees payment, making it a secure and reliable form of payment.
  • Payable to a specific party: Bank drafts are issued payable to a specific payee, ensuring funds are received by the intended recipient.

Difference between a bank draft and a check:

  • Guarantor: A bank draft is guaranteed by the issuing bank, while a check is guaranteed by the individual writing the check.
  • Funds: A bank draft is drawn on the bank's funds, while a check is drawn on the individual's account.
  • Security: A bank draft offers greater security due to the bank's guarantee, making it a preferred option for high-value transactions.

Conclusion

Bank drafts provide a safe and secure way to make payments, especially for high-value transactions or when dealing with unfamiliar parties. They are guaranteed by the bank, offering peace of mind for both the payer and payee.

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