What Is a Bank Draft? A Large Payment Guide

When buying a new house or flashy red convertible, you probably aren’t going to hand the seller a pile of cash as payment. Large transactions such as these instead necessitate safe, secure payments like bank drafts. In this article, we will go over just what a bank draft is, its pros and cons, and how to get a bank draft. 

What Is a Bank Draft?

The bank draft meaning would be defined as “a convenient and secure instrument for making large payments without having to withdraw cash from one’s account.”

A bank draft is a physical way of paying a third party without involving a bag of cash. The process is like the bank writing a cheque for you, but they guarantee the payment, unlike a personal cheque. 

What Does a Bank Draft Look Like?

A bank draft looks like a regular cheque and is made out to the payee. The bank information and the amount paid will also be printed on the draft. However, the payer’s signature is unnecessary, and their name is often not even included.

The Bank Draft Process

Bank drafts work through the following process: 

1. The payer submits a request for a bank draft at their bank. The bank reviews the person’s account to ensure enough money is in the account to transfer. 
2. If there is enough money, the bank approves the request, and the funds are immediately taken out of the payer’s account. 
3. A bank draft is issued for the equivalent amount. This will be displayed in the form of a document that is drafted in the payee’s name. Meanwhile, the bank puts the payer’s funds into a reserve account.  
4. The payer delivers the draft cheque to the third party they are paying. 
5. The payee then presents the bank draft to the bank for payment. After their identity has been verified, the funds are deposited into their account. This may take between 1 to 4 business days to process.

The easiest way to get a bank draft is to walk up to the teller at your bank or credit union and ask for one. Most institutions only provide this service to their customers. 

You can also request bank drafts online through some financial institutions. 

Are Bank Drafts Safe?

The bank draft is guaranteed by the bank, meaning the payee is promised access to the funds. This method is safer than a personal cheque, which can bounce if there are insufficient funds in the payer’s account. 

However, it is important to note that scammers can create a fraudulent bank draft. To ensure the bank draft you’ve received is legitimate, be sure to contact the issuing bank to verify if it is real or not.  

Another scam to be aware of is when someone overpays with a bogus bank draft and asks you to repay them. Later, you will find that the bank draft was not legitimate, and you will have lost the goods you sold them and the extra money you “repaid” them. 

When to Use a Bank Draft?

Bank drafts are used when large payments must be made. They are used most commonly when: 

• Purchasing a vehicle
• Making a tuition payment
• Buying a house
• Sending money internationally 
• Paying a legal settlement

Even though bank drafts don’t expire, some international banking systems don’t take bank drafts older than a few months. Keep this in mind when planning your transaction. 

Now that we have explained what a bank draft is and when to use it is getting a money draft the right solution for you? Let’s weigh the pros and cons.

Pros of Using Bank Drafts

Now that you’ve learned the basics of bank drafts, let’s find out what are the advantages of using this payment method:

• No limitations: There is no maximum amount you can transfer when it comes to bank drafts. This is not true for many other forms of money transfers. That is why bank drafts are a common payment method for large purchases like houses or cars. 
• Variety of currencies: It is possible to obtain bank drafts in other currencies. This makes purchases and investments in foreign countries much easier. Typically the currencies available are CAD, USD, GBP, and Euro.
• Guaranteed availability of funds: The bank guarantees the funds, making bank drafts a safer choice than personal cheques. 
• CDIC coverage: Bank drafts are covered by the Canada Deposit Insurance Corporation (CDIC). This means in the event of a bank failure, your money will be backed by deposit insurance. CDIC coverage allows those participating in the transaction some peace of mind. 

Cons of Using Bank Drafts

Like any payment method, a bank draft has its disadvantages. Here’s what to look out for:

• Risk of fraud: As we’ve mentioned, scammers can produce fraudulent bank drafts and try to scam you out of money. The bank is not responsible for reimbursing your lost money in these cases. 
• Can’t be cancelled: Once the bank draft has been delivered to the third party, it can’t be cancelled. This is because the draft represents a transaction that has already taken place.   
• Fees: Typically, a small fee is charged for a money draft unless you are granted free ones through your banking package. The fee is usually less than $10. 

Alternatives to Bank Drafts

If you’ve decided a bank draft is not the right payment method for you, there are many other methods to consider. Next, we will discuss alternative methods of payment. 

Certified Cheque

A certified cheque is a personal cheque that has been given a stamp of approval by the bank. Similar to bank drafts, certified cheques are guaranteed by the bank. However, certified cheques are issued by the payer instead of the bank. 

If you are considering a certified cheque vs a bank draft, think of a certified cheque as another method that can be used for large payments that are relatively secure. But be aware that certified cheques take a bit longer to obtain than bank drafts and a higher fee. 

Money Order

How about a money order vs bank draft? Money orders are a secure option if you do not have a bank account. They are made out to the payee and are paid by cash or debit card upfront. However, the maximum limit in Canada for money orders is $999.99, which means it isn’t a suitable option for large purchases. 

E-Transfer

Interac e-Transfer is a quick, electronic method for sending money. All you need is the receiver’s phone number or email address. The payer and payee must use Canadian online banking, which means the service is not available for international payments. 

The fee is typically under $1 per transaction or even free for some banking packages. There is, however, a daily limit that can vary between $3,000 and $10,000, depending on the bank. 

Wire Transfer

A wire transfer is an electronic money transfer from one bank account to another. But unlike with an e-Transfer, bank information is needed. If you send the payment within Canada, you will need the payee’s name and address, bank information, and account number. 

It is also possible to send international wire transfers, making it a good choice for foreign transactions. You will need their international bank account number (IBAN), BIC, or SWIFT code. 

Money Transfer Apps

Apps that allow you to send money are similar to e-Transfers, except you can send and receive money internationally. You need the phone number, email address, or username associated with the payee’s account to send money. 

The most popular money transfer apps include Wise, PayPal Canada, Western Union app, WorldRemit Canada, and OFX Canada. 

Conclusion 

If you are looking for a payment method that involves a large sum, is guaranteed by the financial institution, and is available in foreign currencies, you may consider getting a bank draft. Money drafts are relatively safe, but we advise that you still be on the lookout for scammers. 

For smaller transactions that do not involve big purchases like a flashy red sports car or a new house, consider an alternative payment method like a money order, an e-Transfer, or a money transfer app.