Bank Draft

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Bank Draft

A bank draft is a bank-issued payment instrument guaranteed by the issuing institution. The bank withdraws funds from the purchaser’s account and holds them in its reserve until the payee cashes or deposits the draft, which gives the payee certainty that the funds are available. Bank drafts are commonly used for large or unfamiliar transactions where sellers require a high level of payment security.

How a bank draft works

  • You request a draft from your bank or credit union and must have sufficient funds to cover it.
  • The bank withdraws the amount from your account and places the funds in its reserve.
  • The bank issues a draft payable to the named payee; the bank’s guarantee substitutes for the purchaser’s personal check.
  • When the payee deposits or cashes the draft, the bank pays from its reserve.

The draft often includes security features such as serial numbers, watermarks, and anti-tamper encoding to reduce fraud.

How to obtain one

  1. Visit your bank or use its online services (if available).
  2. Provide the payee’s name and the required amount.
  3. Authorize the bank to withdraw the amount from your account.
  4. Pay any issuance fee the bank charges.
  5. Receive the physical draft to deliver to the payee.

Cancelling or replacing a draft

  • Stop payments are often not available because the bank has already guaranteed the funds.
  • If the draft hasn’t been delivered, the bank may be able to cancel or redeem it; processes vary by institution.
  • For lost, stolen, or destroyed drafts, banks typically require documentation and may demand an indemnity or surety bond before issuing a replacement.
  • Once the payee has the draft and deposits it, it generally cannot be cancelled.

Bank drafts vs. other instruments

  • Bank draft vs. certified check:
  • Bank draft: funds are withdrawn and held by the bank; the bank becomes the payer.

  • Certified check: the bank certifies that you have the funds and places them on hold in your account (they are reserved for that check); the check is drawn on your account.

  • Bank draft vs. money order:

  • Both are guaranteed instruments, but money orders usually have lower maximum amounts and are sold at post offices, some stores, and banks.
  • In the U.S., common money order purchase limits (varies by issuer) are around $1,000 for domestic transactions; limits and rules differ by provider.
  • Bank drafts handle much larger sums and typically require obtaining the instrument from a bank.

Costs

Fees vary by institution and may be a flat fee or a percentage of the amount. Some banks waive fees for certain customers. Confirm fees with your bank before requesting a draft.

When to use a bank draft

  • Large one-time purchases (e.g., real estate down payments, vehicle purchases).
  • Transactions with unfamiliar parties who require guaranteed funds.
  • Situations where the payee refuses personal checks and wants bank-assured payment.

Pros and cons

Pros
* Guaranteed funds provide strong assurance to the payee.
* Useful for high-value or risk-averse transactions.
* Lower risk of bounce or returned payment compared with personal checks.

Cons
* Fees and potential administrative delays.
* Difficult to cancel once issued.
* Risk of loss or theft of the physical draft; replacement can be cumbersome.

Key takeaways

  • A bank draft is a bank-guaranteed payment where funds are withdrawn from the purchaser and held by the bank until the draft is cashed.
  • It’s commonly used for large or unfamiliar transactions that require certainty of payment.
  • Bank drafts can be harder and costlier to obtain than alternatives but provide stronger assurance to the payee.
  • Cancelling or replacing a draft can be difficult and may require indemnities or bonds.