Definition of Bank Draft with Example
What is a Bank Draft?
A bank draft is a payment instrument that is guaranteed by a bank. It's a check drawn by a bank on its own funds, payable to a specific payee. It's similar to a cashier's check, but it's issued by a bank upon the request of its customer.
How it Works:
- Request: A customer requests a bank draft from their bank.
- Payment: The customer provides the bank with the funds to cover the amount of the draft.
- Issuance: The bank issues the draft, which is a check payable to the specified payee.
- Payment: The payee presents the draft to their bank for payment.
Advantages of Using a Bank Draft:
- Guaranteed Payment: The draft is guaranteed by the issuing bank, making it a safe and secure payment method.
- Increased Security: The draft reduces the risk of fraud or non-payment.
- Convenience: It simplifies transactions, especially for large amounts.
- International Transactions: Bank drafts are commonly used in international transactions, as they are widely accepted globally.
Example:
Imagine you're buying a car from a private seller and you want to ensure a safe transaction. You can obtain a bank draft from your bank for the car's purchase price. The seller will then present the draft to their bank for payment, guaranteeing the transaction and protecting both parties from potential risks.
Key Points:
- Bank drafts are typically used for large transactions or when dealing with parties who may be unfamiliar.
- The fee for obtaining a bank draft varies depending on the bank.
- You can also use bank drafts for paying bills or other expenses.
Conclusion:
A bank draft is a reliable payment method that offers security and convenience. If you're looking for a safe way to make a large payment, a bank draft can be a valuable option.