Cash isn’t always king when you need to send money or make a large purchase. In fact, it can be seen as a liability and for serious transactions, sometimes a payment method that’s secure and carries a paper trail is preferred.
The most popular alternatives are bank drafts, certified cheques and money orders. They’re all secure payment options, but each has a set of rules and limitations worth looking into before getting any money involved. Here is what you need to know about when and how to use a bank draft, certified cheque and money order.
What Is a Bank Draft?
A bank draft is a payment issued by a bank or credit union on behalf of the account holder. Essentially, it is a piece of paper that says a bank guarantees there are sufficient funds in your account to cover a payment. Bank drafts are often used for major purchases, like buying a house.
Once funds are verified, a bank withdraws the amount of money requested and holds it in a reserve account until the recipient deposits the bank draft. Some banks may refuse to cancel a bank draft because it’s recorded as a transaction when funds are withdrawn. Lost or stolen bank drafts might be replaced if you provide an indemnity bond–a guarantee that one party will be reimbursed should the other party default–as insurance against the loss.
What Is a Money Order?
A money order is a cashable certificate issued by a bank or Canada Post. The certificate is paid for in advance with cash or a debit card (you can’t pay with a credit card). Money orders are a safe way to send payments instead of mailing cash or are useful when you don’t have access to a bank account.
When buying a money order, you have to specify the amount and recipient. Money orders can be cashed or deposited into a bank account in Canada or overseas (additional fees may apply). There’s a serial number and security code attached to every money order that verifies when it’s cashed. Any lost or uncashed money orders are generally refunded after 45 days.
What Is a Certified Cheque?
A certified cheque is a guaranteed form of payment issued by a bank. It’s similar to a personal cheque with the addition of a stamp and signature from a bank. This tells the person or business receiving payment that your bank account has enough money to pay for the cheque.
When a bank issues a certified cheque, those funds are frozen in your account. Once the recipient deposits or cashes the cheque, your bank will release these funds and transfer payment. If a certified cheque isn’t deposited, the amount is transferred back into your account. Most banks will specify a certain number of days before a certified cheque is no longer valid.
Difference Between A Bank Draft, Money Order and Certified Cheque
When it comes to choosing a secure and reliable form of payment, bank drafts, certified cheques and money orders all fit the bill. Ultimately, picking a payment method comes down to the issuer, availability, fees, security and the amount of money you need to send.
| Bank Draft | Money Order | Certified Cheque | |
|---|---|---|---|
| Issuer | Banks | Banks or Canada Post | Banks |
| Amount | No limit | $999.99 | No limit |
| Fees | $9.50-$9.95 | $7.50-$9.95 | $10-$20 |
| Availability | 1-5 business days | Instantly | 1-5 business days |
| Security | Guaranteed by the bank | Guaranteed by the sender | Guaranteed by the bank |
Issuer
Bank drafts and certified cheques are only available at financial institutions, whereas money orders can be issued by a bank or Canada Post. Funds for a bank draft or certified cheque are issued by a bank to the recipient. On the other hand, money orders issue funds as a secure certificate prepaid by the sender with security features that allow them to be safely delivered by mail or in person.
Amount
There is no limit on a bank draft or certified cheque as long as you have the funds available. Money orders are capped at $999.99, but you can purchase multiple money orders at the same time. The issuer must record specific information from the sender and complete a financial report for money orders when the total transaction amount (including fees) is $3,000 or more. This is done to prevent fraud.
Fees
Fees vary for each bank and payment method. Bank draft fees generally range between $9.50 and $9.95. Certified cheques can cost up to $20, depending on whether they’re requested by an account holder with the issuing bank. Money orders are the cheapest option, with fees starting at $7.50. Some bank account service plans (usually the premium packages) will waive these fees.
Availability
For bank drafts and certified cheques, the funds are usually available in the recipient’s account within a few business days. Some banks will release a portion of the funds right away. Money orders are available immediately when cashed or after a few days if deposited into a bank account. Although, no bank account is required to send or receive a money order.
Security
Bank drafts and certified cheques are considered to be more secure because the funds are guaranteed by a bank. Money orders are guaranteed by the person paying, but funds are required upfront instead of being held in a bank account. However, a money order can also be cancelled before it’s cashed, unlike bank drafts and certified cheques.
Bottom Line
Bank drafts, certified cheques and money orders all get the job done of guaranteeing the available funds, but there are a few ways your money tied to them could end up in financial limbo. Consider the amount of money you’re sending and if it’s going to end up in a bank account or as cash. It’s also worth it to weigh insurance options so you can recoup the cash if anything happens while it’s in transit.
Frequently Asked Questions (FAQs)
How does a bank draft work?
To get a bank draft, visit your bank and provide a teller with a government-issued ID, your account information, the recipient’s name and payment amount. They will check your account for sufficient funds and then issue a bank draft. After you give the bank draft to the recipient, they can deposit it into their account to complete the transfer.
How does a certified cheque work?
Request a certified cheque from a teller at your bank. They will ask for a photo ID, the payee’s name and the cheque amount. After they confirm there is enough money in your account, you will receive a printed cheque with a stamp that says ‘certified’. Once you sign the cheque, you can give it to the payee. The payee will have a certain number of days to deposit the certified cheque.
How does a money order work?
Money orders can be purchased from a bank or Canada Post. Bring a valid photo ID and fill out the required form with your name, money order amount and recipient’s name. You must pay the amount on the money order to get a cashable certificate (this is the money order). The maximum amount per money order is $999.99. You can mail the money order or deliver it in person.
What is the difference between a bank draft, money order and certified cheque?
Bank drafts are issued by a bank after verifying available funds and withdrawing the requested amount to put on hold. Certified cheques are similar to bank drafts, but these funds aren’t withdrawn until the cheque is deposited. Money orders are issued by a bank or Canada Post as a prepaid cashable certificate. Money orders can be cancelled, whereas bank drafts and certified cheques cannot be cancelled once they’re issued.
