What is the difference between a Demand Draft and a Cheque?
Both demand drafts and cheques are financial instruments used for making payments. However, they differ in their origin, purpose, and level of security.
Demand Draft
A Demand Draft (DD) is a payment instrument issued by a bank upon the request of a customer. It guarantees payment to the beneficiary named on the draft.
Here are some key features of a Demand Draft:
- Issued by: A bank.
- Payment guarantee: The bank guarantees payment to the beneficiary.
- Used for: Making large payments, paying for goods or services, transferring funds.
- Security: More secure than a cheque as the bank guarantees payment.
- Cost: Typically has a fee associated with it.
Cheque
A cheque is a written order to a bank to pay a specific amount of money from the drawer's account to the payee.
Here are some key features of a cheque:
- Issued by: An individual or organization.
- Payment guarantee: Payment depends on the availability of funds in the drawer's account.
- Used for: Making payments, withdrawing money from a bank account.
- Security: Less secure than a demand draft as it depends on the drawer's account balance.
- Cost: Generally no fee associated with it.
Key Differences
Here is a table summarizing the key differences between a demand draft and a cheque:
| Feature | Demand Draft | Cheque |
|---|---|---|
| Issuer | Bank | Individual/Organization |
| Payment guarantee | Guaranteed | Depends on drawer's account balance |
| Security | More secure | Less secure |
| Cost | Fee associated | Generally no fee |
| Purpose | Large payments, transferring funds | Making payments, withdrawing money |
When to use a Demand Draft or a Cheque
- Demand Draft: Ideal for situations where guaranteed payment is essential, such as large transactions, property purchases, or paying for services.
- Cheque: Suitable for smaller transactions, personal payments, and withdrawals from a bank account.
Ultimately, the choice between a demand draft and a cheque depends on the specific circumstances and the level of security required for the transaction.