The Key Differences Between Demand Drafts and Cheques
Introduction
While both demand drafts and cheques are commonly used financial instruments to make payments, there are certain key differences between the two. In this article, we will discuss the fundamental distinctions between demand drafts and cheques, and which situations each one is better suited for.
Demand Drafts
A demand draft is a pre-paid instrument that is issued by a bank or a financial institution. It is similar to a cheque, but differs primarily in the fact that the funds are paid up front. This means that a demand draft is guaranteed money for the recipient, and there is no chance of it bouncing, unlike a cheque which may bounce due to insufficient funds.
Demand drafts are usually used for larger transactions such as property purchases, educational fees, or investments. They can also be used for international transactions. Further, they are considered to be safer and more reliable than cheques because they cannot be cancelled or withdrawn once they are issued. This makes them a preferred mode of payment for many businesses.
Cheques
A cheque is a written order from a bank account holder to pay a specific amount of money to the person or entity named on the cheque. While cheques are similar to demand drafts in terms of their functionality, they differ in some significant ways. For one, cheques are not prepaid; they are issued against a bank account and are subject to clearance, which means that there is always a risk of bouncing if the account holder does not have sufficient funds.
Cheques are more commonly used for smaller, day-to-day transactions, and are often issued as post-dated cheques for future payments. They are also favoured for their ease of use, as they can be quickly and easily written, issued, and deposited into an account.
Conclusion
In conclusion, while both demand drafts and cheques are popular financial instruments for making payments, they have distinct differences in how they function and for what types of transactions they are best suited. If you require a more secure and reliable method of payment, a demand draft may be the way to go. However, if you need something quick and easy for day-to-day payments or smaller transactions, a cheque may be a better option. Ultimately, the choice is yours, and it is important to consider your specific needs and requirements when selecting a method of payment.
Table difference between demand draft and cheque
| Parameter | Demand Draft | Cheque |
|---|---|---|
| Definition | A bank-issued payment instrument that is prepaid and guaranteed by the bank. | A written order instructing a bank to pay a specified amount of money to the person named on it. |
| Issuing process | Requires the payer to first deposit the amount with the bank and then issue the draft. | The payer can directly issue the cheque from their account. |
| Validity period | Can be valid for up to 3 months. | Can be valid for up to 6 months. |
| Cancellation process | Requires the payee’s consent to cancel the draft. | The payer can cancel the cheque before it is cleared. |
| Security | More secure as the amount is already paid and guaranteed by the bank. | Less secure as the cheque can bounce if the payer’s account does not have sufficient funds. |