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A bank draft is typically used instead of cash or a cheque to make a large payment to a vendor or third party. Unlike other payment methods, like a cheque, it’s a guaranteed form of payment from your financial institution to someone else. That means, a bank draft won’t bounce, which is why it’s the go-to form of payment in some specific instances.
What Is a Bank Draft and How Does It Work?
A bank draft is a form of payment similar to a cheque. You can get a bank draft at one of your financial institution’s branches. If you have a digital bank, you can usually get a draft online or over the phone. When you get a bank draft, the funds are immediately withdrawn from your financial institution.
Is a Bank Draft the Same as a Cheque?
No, a bank draft isn’t the same as a cheque. While it may physically look like a cheque (though often be a little larger), it’s money guaranteed by your financial institution to a third party. Unlike a cheque, you can also get a bank draft in different currencies other than Canadian dollars.
Is a Bank Draft as Good as Cash?
Like cash, a bank draft is a widely accepted form of payment. But, a bank draft is safer than carrying around large amounts of cash on your person, since it’s only payable to the individual or institution it’s made out to. However, a bank draft should be treated like cash in every other way because there may be consequences if it’s lost or stolen.
Is There a Charge for a Bank Draft?
Your financial institution will usually charge you for a bank draft although certain accounts or banking packages allow you to get free bank drafts.
How Much Does a Bank Draft Cost?
The cost of a bank draft depends upon the type of account you have. Some accounts charge a monthly fee and the cost of drafts is included in that fee. The monthly fee can usually be waived if you maintain a minimum monthly balance at all times. If you don’t have an account where bank drafts are included, the cost can be up to $9.95 each.
Can Bank Drafts be Cancelled?
Yes and no. A bank draft typically can’t be cancelled once you give it to someone as a form of payment. That still applies even if the item you purchase doesn’t work as promised. However, if you use a draft and change your mind about the purchase or the seller cancels the sale, you can return the draft back to the financial institution and have your money deposited back into your account.
If you lose a bank draft before it’s delivered, you can get it replaced. However, you may need to provide a surety bond (a type of bond that protects the financial institution if the original draft is found and deposited) or sign an indemnity (an agreement that will force you to pay back the institution if the first draft is deposited) before the draft is replaced.
What Is the Purpose of a Bank Draft?
A bank draft is usually used for making a large purchase. You will typically need to give a bank draft to your lawyer when purchasing a home. The funds will usually cover the down payment and closing costs.
A bank draft can also be used for buying a vehicle or other expensive items. For instance, when renovating your home, some contractors might not accept credit cards or cheques as a form of payment and instead prefer a bank draft because the funds are guaranteed by a financial institution.
Can a Bank Draft be Deposited in Any Bank?
Yes, bank drafts can be deposited at a bank or credit union. You have the option of making the deposit at the branch, through an ATM, or by using your financial institution’s app. If the draft is for a very large amount, you may need to deposit it at the branch as it might not be accepted through the app.
How Long Does a Bank Draft Take to Clear in Canada?
Similar to a cheque, a bank draft may take a few days before it clears if it’s from a Canadian financial institution. If the draft is from an institution based outside of the country, it may take up to 30 business days for it to clear.
Bank Drafts vs. Money Orders
A money order is useful if you don’t have a bank account and are unable to send a cheque or e-transfer. Bank drafts and money orders have some similarities, but there are differences as well:
Special Considerations When Using Bank Drafts
Bank drafts should be treated like cash and be kept in a safe place. Try not to lose a draft or you’ll need to get a new one. If the person you give the draft to loses it, it can be replaced. However, if they find it and deposit both drafts, you’ll be on the hook for the amount on both of them.
Drafts can be forged so be careful when accepting a draft as payment. You can contact the issuing financial institution to confirm a bank draft’s authenticity. If you don’t need a lot of money for a payment, it may be easier and quicker to send an e-transfer or cheque.
Frequently Asked Questions (FAQs)
Why would someone use a bank draft?
A bank draft is typically used when making a significant purchase. Some instances may include buying a home, purchasing a car or boat, or buying an expensive piece of artwork. These purchases are typically tens of thousands or hundreds of thousands of dollars.
What is the difference between bank draft and cheque?
A bank draft is guaranteed by the financial institution and the funds are withdrawn from your account immediately. A cheque has no guarantees and the funds will stay in your account until it’s deposited. If it’s a certified cheque, the financial institution will freeze or hold the funds until the cheque is deposited by the recipient. Note that not all financial institutions still certify cheques.
Can a bank draft be cashed by anyone?
Only the person or a representative of the entity the bank draft is made out to can cash a bank draft. It can’t be cashed by anyone else.
