When a cheque is issued, there is always a risk of it being dishonoured due to insufficient funds in the drawer’s account. But in the case of a demand draft, the amount is already paid for in full before the draft is issued, making it a much safer option. This infact is the core of any business as businesses operate to earn money.
A cross cheque consists of two parallel cuts over the top left to signify its value separately for the bearer.
Difference Between a Cheque and a Demand Draft
It can be used for various purposes, such as making payments, settling debts, or transferring funds. On the other hand, a demand draft is a prepaid instrument issued by a bank, guaranteeing the payment to the recipient. It is typically used for larger transactions and is considered more secure than a cheque, as it is paid in advance and cannot bounce. While cheques are more commonly used for day-to-day transactions, demand drafts are preferred for more significant financial dealings.
Can both cheques and demand drafts be used for making payments?
- When a cheque is deposited into the payee’s bank account, it undergoes a clearance process.
- In medieval Europe, cheques were used by traders to pay for goods and services, and they were often written on pieces of paper called “bills of exchange.”
- The draft will not be passed if the payee fails to submit the documents.
- But in the case of a demand draft, the amount is already paid for in full before the draft is issued, making it a much safer option.
Compared to demand drafts, online payment systems typically offer faster processing times, allowing transactions to be completed in real time. A demand draft is a financial instrument used for making payments or transferring funds between two parties. It is a type of cheque that is guaranteed by the issuing bank and is commonly used in situations where the payee requires a more secure form of payment than a personal check.
Types of Demand Draft
In the modern era, cheques are used for a variety of purposes, including paying bills, making purchases, and transferring money between accounts. To write a cheque, the account holder must fill out the necessary information, including the payee’s name, the date, and the amount of money to be paid. The account holder must then sign the cheque and present it to the payee or deposit it into their account. Cheques can be written in any currency and can be drawn on any bank or financial institution. They can also be customized with logos, slogans, and other branding elements, making them a useful marketing tool for businesses.
Dishonour of a cheque due to insufficient funds in the issuer’s account is regarded as a criminal offence. A ‘Cheque Return Memo‘ is issued by the drawee bank to the payee bank, signifying the cause for non-clearance of the cheque, which the payee’s bank gives to the payee along with the bounced cheque. Banks collect and send money in various methods, including the use of promissory notes or bills of exchange. Cheques, bank drafts, and several other subcategories of the same are examples of such tools. The key feature of a demand draft is that it is payable to the payee on demand i.e., immediately when it is presented for payment by the payee to the bank.
While demand drafts often incur transaction fees, more and more online payment systems may also offer free transactions for certain transfers or within specific limits. This may be free transactions based on the number difference between cheque and dd of quantities or free transactions based on the size of the transaction. Consider how popular shopping websites can easily facilitate online payments for free. A demand draft is a method used by an individual to make a transfer payment from one bank account to another.
