Bank drafts and checks are instruments that permit the transfer of money, but that's where their similarities end. If you are the named payee on a bank draft or a check, you can receive money in exchange for your endorsement, or signature. These instruments differ when it comes to their guarantee. If you have any doubts whether the payor has the money to pay you and you have a choice of whether to receive a bank draft vs. a check, avoid choosing the latter.
Understand How Bank Drafts Work
The Corporate Finance Institute provides online training for the general public and subject matter experts who want to learn about financial instruments, such as bank drafts and checks.
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When you receive a bank draft, there's an ironclad guarantee that the funds are available for payment. If you are using a bank draft for payment for goods or services, it shows you have sufficient funds in your own account to obtain a bank draft. Bank drafts typically are used for large purchases – this is not the type of financial instrument you want to use to pay the cashier at the grocery store. Although bank drafts are used for a precise amount that you know in advance, you wouldn't want to use a bank draft for paying your monthly utility bill either. Bank drafts are useful for paying large sums of money where the payee wants a guarantee that a bank check might not provide. An example is earnest money used to demonstrate a good faith effort in purchasing a home. According to the IRS, a bank draft is as good as cash.
Obtaining a Bank Draft
Online banking saves time and effort, except when you need a bank draft. A bank draft is a live check, and you have to visit your bank to request one. Your banker will verify that you have sufficient funds in your account to cover the bank draft, plus applicable fees. The fees are nominal, usually just a few dollars, and if you're a high-dollar account holder, it's possible you can get the fee waived. Some banks permit customers to obtain a certain number of bank drafts per year at no charge. In some cases, a bank draft is referred to as a "certified check" or a "cashier's check." A certified check is immediately drawn upon the funds in your bank account; however, the process for a cashier's check differs slightly because a cashier's check is technically drawn on the bank's funds – after you have transferred the funds from your own account to the bank.
Writing a Personal Check
You needn't leave your sofa to write a check. If you're among the 7 percent or so of American adults who don't use the internet, then you're probably accustomed to check writing. Using non-electronic means to create, send and receive payments might seem foreign and time-consuming to some Millennials, however. The vast majority of this generation – close to 100 percent – use the internet.
Before online banking became popular, when you opened a checking account, the bank issued a checkbook and placed an order for your initial set of checks. Banks still provide checks to account holders, but you might have to ask for them, given the common practice of paying bills and buying goods using debit and credit cards, or using your bank's wire transfer process to send money.
A check is only guaranteed when you have sufficient funds in your checking account. And the payee who receives a check from you won't know if the funds are still in your account by the time they cash or deposit your check. For example, at the time you write a check, your checking account could have plenty of money in it. But if you're not careful with your accounting and reconciling your bank account, there's always the possibility that you could write more checks than your account can cover. When that happens, the check you write could be returned, marked "insufficient funds" and you and the person to whom you wrote the check could be charged a bank fee for processing a bounced check.
- Corporate Finance Institute: Resources: Knowledge: Finance: Drank Draft
- Forbes:Personal Check Vs. Certified Check Vs. Cashier's Check
- Forbes: What Is a Checking Account and How Does it Work?
- Pew Research Center: 7% of Americans Don't Use the Internet. Who Are They?
- Pew Research Center: Millennials Stand Out for Their Technology Use, but Older Generations Also Embrace Digital Life
- Forbes: What Is Earnest Money and Who Do I Need It?
- IRS: Cash Payment Report Helps Government Combat Money Laundering
- Wealth Pilgrim: How to Reconcile a Bank Statement - 5 Easy Steps