There are three primary types of bank drafts, each of which offers a method of payment guaranteed by the issuer. The guarantee is made possible by the bank putting a hold on the funds in a customer’s account, or depositing funds to the issuer in the amount of the draft. The guarantee provided by the issuer increases the security of the transaction for the recipient and usually will be cleared faster than a payment made with a personal check.
Cashier’s checks are drawn against the funds of the bank, and the bank provides a guarantee of payment when the check is presented. Cashier’s checks originate either with a cash payment or by debiting the account of the customer making the payment. The funds then are held in the bank’s escrow account until the check presented for payment. As a result, the bank is the payer of the check. The liability of the bank for payment of the check, rather than the individual or business entity, provides added assurance to the recipient that the check will be paid.
A certified check is a personal check signed by the account owner. To be certified, the check is stamped and signed by a bank officer after it is confirmed that the customer’s account has enough funds to cover the check. The bank then puts a hold on funds in the customer’s account for that amount. The held funds are drawn from the account when the check is presented for payment.
Money orders can be issued by banks, but are also issued by a variety of non-bank institutions, including the U.S. Postal Service and Western Union. These instruments are similar to cashier’s checks in that money is deposited and held by the issuer, which then guarantees the funds will be available when the money order is presented for payment. One disadvantage as compared to cashier’s and certified checks is that issuers, including banks, commonly cap the payable amount at $1,000 per money order.