What Is a Bank Draft?
A bank draft is a type of check that guarantees payment by the bank that issues it. A bank draft typically is used in any transaction involving a large amount of money where the buyer or seller requires assurance that the funds will be paid. Bank drafts are frequently used in international transactions and real estate transactions.
Key Takeaways
- A bank draft is a negotiable instrument that authorizes and guarantees a specific payment amount.
- It is also referred to as a bank check or cashier's check.
- Some financial institutions abroad may not accept a bank draft that is over six months old.
- Bank drafts are often used when buying a home or condo, a new car, or when renting an apartment.
- A bank draft is similar to a money order, but the latter has limits on the amount payable.
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How Bank Drafts Work
A bank draft is requested and obtained by a bank customer. The customer either hands over cash for the required draft amount or has the bank deduct the amount of the draft from their account. It is this action that guarantees payment of a bank draft; the bank only issues it when the money is in its own account.
When the bank customer requests a bank draft, they provide the bank with information needed to create it, such as an account number, the payee’s name and address, and the amount of money to be paid.
The bank then issues a bank draft in the customer’s name that can be used for the intended transaction between the two parties (the customer and the payee). When the payee receives the bank draft, they can deposit it at any bank because it is treated as cash, unlike with a personal check (which hasn't been pre-verified).
It can be difficult to cancel or stop payment on a bank draft since the buyer has already paid out the funds that the draft represents.
Typically, a bank draft does not expire. However, it is recommended that a bank customer not purchase one too far in advance of a transaction and the recipient not hold on to it for long before depositing or cashing it.
Bank drafts can be used abroad. For example, if you are buying a house in a foreign country, a bank draft drawn on your account can provide funds in a specified currency, instead of having to be converted from U.S. dollars on the recipient's end.
Bank Draft vs. Money Order
A bank draft is similar to a money order in that both are negotiable instruments issued by a bank or approved enterprise such as a store or post office. They both offer a secure method of payment. However, it's been found that money orders are sometimes used formoney laundering. As a result, many governments limit how much money can be converted into a money order while bank drafts have no limits.
If a bank draft is lost or stolen, reporting it immediately to your financial institution is critical to having the bank put a stop on the draft.
Advantages and Disadvantages of a Bank Draft
Advantages
- Recipient is guaranteed payment
- Can't be denied due to insufficient funds
- More convenient than cash for transactions involving large amounts of money
- More secure than cash
Disadvantages
- Requires time and effort to obtain
- A fee is usually involved
- Cancelation by bank can be difficult since the bank's transaction has occurred
- If lost or stolen, funds can be difficult to trace
Canceling a Bank Draft
It is difficult to cancel or stop payment on a bank draft because, in effect, a bank draft represents a transaction that has already occurred.
Since the buyer has already paid the funds represented by the bank draft, the onlymeans of effectively canceling the draft is to have the seller cash it and return the funds to the buyer.
However, if the draft has been lost, stolen or mistakenly destroyed, the buyer may be able to cancel the draft by returning to their bank, explaining that the draft is irretrievable, and presenting to the bank the reference number or a printed copy of the draft.
As long as the bank can verify that the draft has not been cashed, it can cancel it and issue a new, replacement draft.
Before you obtain a bank draft from your bank, be sure to verify its bank draft cancellation and replacement policies.
Do You Have to Pay for a Bank Draft?
Normally, yes. Banks charge a flat fee or a fee equal to a percentage of the draft total. However, a bank may waive the fee depending on a customer's relationship with the bank or the type of account that they have.
Do I Sign the Bank Draft?
No. Your bank does because it, not you, is the party issuing the check. For the same reason, when you write a personal check, you sign that.
Is There a Limit for a Bank Draft?
No, there is no specific dollar amount to which you're limited when requesting a bank draft. That's an important reason why bank drafts are used for transactions involving large amounts of money.
The Bottom Line
Bank drafts, with their assurance that funds will be paid, are secure and convenient methods of payments for large and/or important transactions, both domestic and international. Unlike for personal checks, there is no risk that a bank draft may bounce. However, banks usually charge a fee for them and they require time and some effort to obtain.
