Bank Draft: Definition, How It Works, and Example
One of the key advantages of using a bank draft is that it provides a level of security for both the payer and the payee. Since the draft is issued by a bank, it is considered to be a guaranteed form of payment. This reduces the risk of fraud or non-payment.
Furthermore, bank drafts are widely accepted by banks and financial institutions around the world. This makes them an ideal payment method for international transactions, where other forms of payment may not be accepted or may incur high fees.
For example, let’s say John wants to purchase a car from a seller in another country. Instead of sending a personal check or making an international wire transfer, John can request a bank draft from his bank. He provides the necessary details to the bank, and they issue a bank draft in the seller’s name for the agreed-upon amount. John then sends the bank draft to the seller, who can deposit it into their bank account with confidence, knowing that the payment is guaranteed.
In summary, a bank draft is a secure and reliable method of making payments, especially for international transactions. It provides a guaranteed form of payment and is widely accepted by banks and financial institutions. Using a bank draft can help reduce the risk of fraud and ensure that payments are received in a timely manner.
What is a Bank Draft?
When a bank draft is used, the bank withdraws the specified amount of money from the customer’s account and holds it in its own account. The bank then issues a draft, which is a written order, to pay the specified amount to the designated recipient. The draft is typically made payable to a specific person or organization and can only be cashed or deposited by the named payee.
How Does a Bank Draft Work?
Here is a step-by-step guide on how a bank draft works:
Step 1: Requesting a Bank Draft
Step 2: Paying for the Bank Draft
Once you have provided all the required information, you will need to pay for the bank draft. The bank will typically charge a fee for this service, which can vary depending on the amount of money involved.
Step 3: Bank Verification
After receiving your payment, the bank will verify that you have sufficient funds in your account to cover the amount of the bank draft. This verification process ensures that the bank draft is backed by real funds.
Step 4: Issuing the Bank Draft
Once the bank has verified your funds, they will issue the bank draft. The bank draft will typically include the recipient’s name, the bank’s name and address, the amount of money, and a unique identification number.
Step 5: Delivery or Collection
Once the bank draft is issued, you can choose to have it delivered to the recipient or collect it yourself. If you opt for delivery, the bank will send the bank draft to the recipient’s address through a secure courier service. If you choose to collect it, you can visit the bank and pick it up in person.
Step 6: Recipient’s Deposit
Once the recipient receives the bank draft, they can deposit it into their bank account. The bank will then verify the bank draft and credit the funds to the recipient’s account. This process may take a few business days to complete.
Overall, a bank draft provides a secure and convenient way to make large payments. It eliminates the risk of bounced checks and ensures that the funds are guaranteed. However, it is important to note that bank drafts may have fees associated with them, and the process may take longer compared to other forms of payment.
Benefits of Using a Bank Draft
A bank draft is a secure and convenient method of payment that offers several benefits to both the payer and the recipient. Here are some of the advantages of using a bank draft:
One of the main benefits of using a bank draft is the high level of security it provides. When you request a bank draft, the funds are immediately withdrawn from your account and held by the bank. The bank then issues a draft, which is a guaranteed form of payment. This means that the recipient can be confident that the funds will be available when the draft is presented for payment.
Bank drafts are also convenient to use. They can be easily obtained from your bank and can be used for various purposes such as making payments for goods and services, paying bills, or sending money to someone. The process of obtaining a bank draft is usually quick and straightforward, making it a hassle-free payment option.
4. Wide Acceptance
Bank drafts are widely accepted as a form of payment, both domestically and internationally. They are recognized and honored by banks and financial institutions worldwide, making them a reliable method for making payments across borders.
5. Proof of Payment
When you use a bank draft, you receive a receipt or a copy of the draft as proof of payment. This can be useful for record-keeping purposes and can serve as evidence of payment in case of any disputes or discrepancies.
Overall, using a bank draft offers security, certainty, convenience, wide acceptance, and proof of payment. It is a reliable and efficient method of payment that can be beneficial for both individuals and businesses.
Bank Draft vs. Personal Check
A personal check, on the other hand, is a payment instrument issued by an individual from their personal checking account. It is a written order instructing the bank to pay a specific amount of money to the person or entity named on the check.
One of the main advantages of using a bank draft is the added security it provides. Since the funds are withdrawn from the customer’s account at the time of issuance, the recipient can be confident that the payment will not bounce or be returned due to insufficient funds. This makes bank drafts a preferred method for large transactions or when dealing with unfamiliar parties.
Personal checks, on the other hand, rely on the account holder having sufficient funds in their account at the time the check is presented for payment. There is a risk of the check bouncing if the account does not have enough funds, which can lead to delays and additional fees for both the payer and the payee.
Personal checks, on the other hand, may not be accepted by all parties, particularly in situations where there is a need for immediate payment or when dealing with large amounts of money. Some businesses may require other forms of payment, such as cash, credit cards, or electronic transfers.
Example of Using a Bank Draft
Let’s say you are purchasing a car from a private seller. After negotiating the price and terms, you both agree on a final amount. Instead of carrying a large sum of cash or writing a personal check, you decide to use a bank draft for the transaction.
Once you have the bank draft in hand, you meet with the seller to complete the transaction. You hand over the bank draft, and the seller verifies its authenticity and amount. They may also ask for identification to ensure the draft is being used by the intended recipient.
The seller can then take the bank draft to their own bank and deposit it into their account. Unlike a personal check, a bank draft is considered a guaranteed form of payment, so the seller can be confident that the funds will be available.
After the bank processes the draft, the funds are transferred from your account to the seller’s account. This process typically takes a few business days, depending on the banks involved.
Using a bank draft for this transaction provides several benefits. Firstly, it eliminates the need to carry a large amount of cash, reducing the risk of loss or theft. Secondly, it provides a secure and guaranteed form of payment for both parties involved. Lastly, it simplifies the transaction process by ensuring the funds are readily available and easily transferable.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.