Bank Draft: An Overview
Let me start by explaining what a bank draft is—it's a secure payment method guaranteed by the issuing bank. Unlike a personal check, the full amount gets drawn from your account and held in the bank's reserves until the payee cashes it. This setup makes bank drafts a go-to choice for big transactions, like buying property, where the seller wants absolute certainty that the funds are there.
In this piece, I'll cover how bank drafts work, how they stack up against things like money orders and certified checks, the fees involved, and when you might need one. Stick with me, and you'll get a clear picture of this financial tool.
Understanding the Mechanics of a Bank Draft
You have options for secure payments, such as certified checks, wire transfers, or bank drafts—each providing the payee with guaranteed funds. Bank drafts, sometimes called banker's drafts or teller's checks, are backed by the bank and commonly used for large sums, like a down payment on a house.
When you request one, the bank checks that you have enough in your account, then pulls the money out and parks it in their reserve account. They prepare the draft with your name, the amount, and the payee's details, adding security features like serial numbers, watermarks, and micro-encoding to prevent fraud.
Here's a key point: since the funds are already taken from your account, the bank becomes the payer in essence. Sellers often insist on bank drafts when dealing with unknown buyers, high-value deals, or potential collection issues. Banks charge for this service, either a flat fee or a percentage, though they might waive it for valued customers or high-net-worth individuals.
How to Cancel a Bank Draft
Canceling a bank draft isn't straightforward—some banks won't allow stop payments because they consider the transaction done. If you need to reverse it, you'll typically have to redeem the draft for the full amount. For lost, stolen, or destroyed drafts, cancellation or replacement is possible, but only with the right documentation, like a surety bond or indemnity agreement. Remember, once it's in the payee's hands, you can't cancel it; as the buyer, you're on the hook for delivery.
Comparing Bank Drafts and Money Orders
Both bank drafts and money orders guarantee a specific amount and offer security without carrying cash. With a bank draft, the bank uses its funds after taking yours, while money orders are bought with cash or debit—not credit.
You can only get bank drafts from banks or credit unions, but money orders are available at stores, post offices, and banks. Due to money laundering risks, U.S. money orders max out at $1,000 domestically or $700 internationally, whereas bank drafts handle much larger amounts. This makes money orders cheaper and easier to obtain, but bank drafts go through a more rigorous process.
What Is the Difference Between a Bank Draft and a Certified Check?
The main difference lies in fund handling: for a bank draft, funds are withdrawn from your account and placed in the bank's reserves, with the bank issuing and guaranteeing the check. For a certified check, the bank guarantees it too, but your funds stay in your account on hold until it's cashed.
How Much Does a Bank Draft Cost?
Costs vary by bank—some charge a flat fee, others a percentage of the amount. For instance, TD Bank charges $9.95 per draft. Check with your institution for specifics.
Key Points About Using Bank Drafts
Bank drafts aren't for everyday buys, but they're invaluable for major purchases where sellers want security. If you're buying a car or home, a seller might require one to ensure payment. You pay the bank a fee, get the draft, and hand it over—it's that straightforward for guaranteeing funds.
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