A draft check, more commonly known as a bank draft, is a guaranteed payment method similar to a check, but its funds are secured by the issuing bank.
Here's a more detailed breakdown:
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Guaranteed Funds: Unlike a personal check, where funds may not be available, a bank draft guarantees that the money is available. The bank verifies that the payer has sufficient funds and then sets those funds aside in the bank's own account. This provides assurance to the payee that the payment will clear.
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Issuing Bank's Responsibility: The bank, not the individual, is responsible for paying the draft. This reduces the risk for the payee, as the bank's creditworthiness stands behind the payment.
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How it Works:
- The payer requests a bank draft from their bank.
- The bank debits the payer's account for the amount of the draft, plus any fees.
- The bank holds the funds in its reserve account.
- The bank issues the bank draft to the payer, who then gives it to the payee.
- The payee deposits or cashes the bank draft at their bank.
- The payee's bank presents the draft to the issuing bank for payment.
- The issuing bank releases the funds from its reserve account to the payee's bank.
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Use Cases: Bank drafts are often used for:
- Large purchases (e.g., cars, real estate)
- International transactions
- Situations where the payee requires a guaranteed form of payment
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Advantages:
- Security: Offers a higher level of security compared to personal checks.
- Acceptance: Widely accepted, especially for large transactions.
- Guaranteed Payment: The payee is assured that funds are available.
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Disadvantages:
- Fees: Banks typically charge a fee for issuing a bank draft.
- Time: Obtaining a bank draft may take longer than writing a personal check.
- Availability: Not all banks offer bank draft services.
In essence, a bank draft (or draft check) functions as a safer and more reliable alternative to a personal check, backed by the financial institution issuing it.
