What Is Bank Draft?
A bank draft is an order from one branch to another branch of the same bank to a specified sum of money to the person named or to his order.
Definition 2
A bank draft is a payment instrument drawn on the bank's money rather than on the consumer's account. It is a guaranteed payout, akin to a cashier's check. On the other hand, a bank draft is drawn on the bank's account, whereas a cashier's check is drawn on the customer's account.
More Thorough Understanding of the Term
A person who wants to send money can buy a draft by paying the required amount from a bank and send it to another who can encash it in his place. Banks issue drafts for a nominal commission. The commission depends upon the amount to be remitted. This service is extended to the public in general. The purchases of the draft need not be a customer to the account holder of the bank.
A customer must give the bank the amount of money they desire to transfer as well as the name of the recipient to obtain a bank draft. The bank then issues a draft for the requested amount, payable to the recipient. After that, the bank draft can be mailed or delivered to the receiver.
When the bank draft is received, the recipient can deposit it into their account just like a regular check. The bank then validates the bank draft and releases the monies to the receiver. Because the bank has previously verified that the funds are accessible and have set them aside to be paid out, the bank draft is considered a guaranteed payment.
Advantages of Using Bank Drafts
One of the primary advantages of using a bank draft is that it is a secure payment method. Because the bank guarantees the bank draft, there is no chance of the money bouncing or being fraudulent. This is especially true for large transactions or those involving unfamiliar parties.
Another advantage of using a bank draft is that it is generally faster than other means of payment. The money is guaranteed and available instantly with a bank draft, so there is no need to wait for the payment to clear or for the recipient to authenticate the payment.
Finally, bank drafts are frequently less expensive than other payment options, such as wire transfers or credit card transactions. Banks normally charge a set price for issuing a bank draft, which is frequently lower than fees connected with other payment options.
Examples of Bank Drafts
Example 1
A bank draft can be used to transfer payments between the buyer and seller when buying or selling a home or property. The vendor frequently requires this to secure a guaranteed payment.
Example 2
Bank drafts can be used for commercial purposes, such as paying suppliers or vendors. This provides both parties with a secure and guaranteed payment method.