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Bank Draft: An Overview
Bank drafts offer a secure form of payment guaranteed by the issuing bank. Unlike personal checks, the full amount is drawn from the payer’s account and held in the bank’s reserve until the payee cashes the draft. This assurance makes bank drafts a preferred payment method for large transactions, such as buying property, where the seller demands certainty of funds.
In this article, you’ll learn about the mechanics of bank drafts, how they differ from similar financial instruments like money orders and certified checks, the costs associated with them, and situations where they might be required.
Key Takeaways
- A bank draft is a secure method of payment where the issuing bank guarantees the amount, drawing funds from the payer’s account and holding them until the draft is cashed by the payee.
- Bank drafts are often used for significant transactions like real estate purchases, providing assurance to sellers that they will receive their payment.
- Unlike personal checks, a bank draft involves transferring money to the bank’s reserve account, so the bank essentially becomes the payer.
- While bank drafts provide security, they come with fees, and once issued, they can be challenging to cancel or replace without necessary documentation.
- Compared to money orders, bank drafts can accommodate larger amounts, though obtaining them might be more complex and costly.
Understanding the Mechanics of a Bank Draft
You have several options available to make secure, certified payments, including certified checks, wire transfers, and bank drafts. Certified payment options give the payee more security because the funds are guaranteed.
Bank drafts, also known as banker’s drafts, bank checks, or teller’s checks, are guaranteed by the bank and often used for large transactions. You might need a bank draft for big purchases, like a down payment on a property.
When you request a bank draft, the bank ensures you have enough money in your account to cover the amount requested. It then withdraws the money from your account and moves it to the bank’s reserve account.
The bank prepares the draft with your name and the payment amount to the payee. It includes a serial number, watermarks, and possibly micro-encoding to ensure it’s legitimate.
Note
Since the funds are already withdrawn from your account when you buy the draft, the issuing bank essentially becomes the payer.
Bank drafts may be required by a seller when they have no relationship with a buyer, when a transaction involves a large sum, or if the seller believes collecting payment may be difficult.
Banks usually charge for drafts, which can be a flat fee or a percentage of the draft amount. They might waive this fee for loyal customers or high-net-worth individuals (HNWIs).
How to Cancel a Bank Draft
Some banks don’t allow stop payments on drafts because, in their records, the transaction is complete.
If you want to reverse the transaction, the bank usually requires that you redeem the draft for the full amount. In some cases, it is possible to cancel or replace a lost, stolen, or destroyed draft as long as you have the required documentation.
Comparing Bank Drafts and Money Orders
A bank draft and a money order are both guaranteed for a specific amount, and they are both considered a secure method of payment for a payee.
With a bank draft or money order, you don’t need to carry a lot of cash. A bank draft uses bank funds after receiving the money from you, while a money order is bought with cash or a debit card—not a credit card.
Tip
You can only purchase bank drafts from a financial institution like a bank or credit union. You can buy money orders from certified stores, post offices, and banks.
Since money orders could be used to launder money, you can only purchase a money order in the U.S. for up to $1,000 if you are sending it domestically or for up to $700 if you are sending it internationally. Bank draft amounts can be much higher.
Because money orders have lower limits and banks undergo a detailed process for drafts, money orders usually cost less. It’s often harder to get a bank draft since it must be obtained from your bank.
What Is the Difference Between a Bank Draft and a Certified Check?
With a bank draft, the funds are withdrawn from your bank account, and then the check is made out by the bank, which guarantees it. Your funds are placed into the bank’s reserve account. With a certified check, the money is also guaranteed by the bank, but your funds are not withdrawn until the check is cashed. Instead, they are placed on hold.
How Do You Cancel a Bank Draft?
Once a bank draft is given to the person it was intended for, it cannot be cancelled. You, as the purchaser, are responsible for delivering the draft to the payee. If you lose it, you will have to take several steps to get a new draft, which may include providing a surety bond or signing an indemnity.
How Much Does a Bank Draft Cost?
The cost of a bank draft will vary by financial institution. Some may charge a flat fee while others may charge a percentage of the check amount. For example, TD Bank charges $9.95 for a bank draft.
Key Points About Using Bank Drafts
While not ideal for everyday purchases, bank drafts can be very useful payment methods when you are making a major purchase. A seller may request a bank draft for added security to ensure they will receive their funds. You may find you need to provide a bank draft for purchases like a car or a home. In that case, you can pay a fee to a bank to get the draft, which you then provide to the seller.
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