Bank Draft Vs. Check
Despite their similarities, checks and bank drafts are distinct financial instruments. A check is an order made by a bank account holder for the bank to pay money to a specified party from the account, while a bank draft is an order to pay money from the bank itself, for various reasons, to a specified party.
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Checks vs. Bank Drafts
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Checks and bank drafts are both orders to pay money. A key difference between the two is that in the case of a bank draft, the payment of funds is guaranteed by the bank ahead of time, while payment of an ordinary check depends on there being sufficient funds in the check writer's account.
Who Uses Bank Drafts
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Bank drafts are often used by banks in making payments to other banks, but individual bank customers may also use them in certain situations.
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Bank Drafts Instead of Checks
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In some cases, a creditor or vendor isn't inclined to accept an ordinary check as payment from a debtor or customer, especially when the amount of money is quite large, and so requests a bank draft instead of a check because of certainty of payment.
Why Bank Drafts Are Guaranteed
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When a customer requests a bank draft, the bank withdraws money from the customer's account immediately and holds it under its own account. Thus, when the payee requests payment, it comes from the bank directly, without regard to the original customer's current account balance.
International Uses of Bank Drafts
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Bank drafts are also a way to make payment to a payee in another country who will not accept checks drawn on a foreign bank. In that case, the original bank withdraws from the customer's account and sends the bank draft to a correspondent bank in the other country, which will then make payment to the payee in an equivalent amount of local currency.
Automatic Bank Drafts
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Automatic bank drafts, which have become popular ways to pay recurring bills in recent years, work the same way as one-time bank drafts except that the customer's bank withdraws a fixed amount of money at the same time each month for payment of the bank draft.
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References
- Photo Credit Image by Flickr.com, courtesy of Abd Essamad
