How do bank drafts work? | TD Stories (2024)

FAQs

How do bank drafts work? ›

A bank draft is a payment that is guaranteed by the issuing bank. Bank drafts are often used for larger payments such as a down payment on a home. Banks verify and withdraw funds from the payer's account and deposit them into an internal account, or a reserve account.

Once the request is submitted, the bank reviews the individual's account to see if he or she has sufficient funds to transfer. If the individual has sufficient funds, the bank approves the request, withdraws funds from the individual's account, and issues a bank draft for an equivalent amount.

“Bank drafts are validated once they're deposited and processed by the negotiating institution – and can be returned if found to be counterfeit. If accepting a bank draft as payment, it's advisable to wait until the draft has cleared and the money has been confirmed before completing a sale.”

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.

Only the person or a representative of the entity the bank draft is made out to can cash a bank draft. It can't be cashed by anyone else.

It's a paper document that looks a lot like a regular cheque. The main difference is that someone who receives a bank draft has a guarantee that the funds are available, as opposed to a regular cheque, which could bounce. Bank drafts are made out to the person receiving the money.

Most payments can be made instantly online or using mobile banking, but paper cheques and banker's drafts are still an option. They're slower though, with money usually available the working day after it's paid in.

How long does a bank draft take to clear? Most checks take several days before you receive funds in your account. But bank drafts clear much more quickly, often appearing in your account within 24 hours. That's because the issuer's guarantee means fewer steps are needed to verify that the money is present.

The time frame or the clearing time of a DD varies between banks. They are usually cleared within half an hour, or by the end of the working day. Some banks can take up to three working days. Also, if the DD is for a large amount, it will only be credited to a bank account and not provided as cash.

A bank draft is a secure, physical form of payment to a third party that is guaranteed by the issuing bank or credit union. It's available in numerous currencies.

Can I trust a bank draft? ›

Unlike a personal cheque, a bank draft is guaranteed by the financial institution, so the person to whom the bank draft is payable is sure to receive the amount on the draft.

Once delivered, bank drafts can't be cancelled. If it gets lost, damaged or stolen, getting a refund or replacement might require getting a Bond of Indemnity. To avoid any such situation, it's best to hand over your bank draft in person or consider using a reliable, trackable delivery method.

You can cash a bank draft immediately after it's been processed. That said, the funds won't be deposited into your bank account immediately. Due to the fact your bank secures the funds, it will take some time to verify that the funds will be deposited into the correct account.

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.

You'll need to fill the DD cancellation form and submit it along with the original DD. The amount will be credited into your account after the bank deducts the cancellation charge. If the demand draft has expired and has not been encashed by the payee, the amount is not automatically credited back into your account.

A hold could be for as little as one day or for four or more days. During the hold, the financial institution seeks to verify that the funds are available from the account at the financial institution from which the financial instrument is drawn.

But in practice some banks refuse to accept them after 6 months. If that happens and you have the original draft, it should be straightforward to get the issuing bank to replace it.

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.