Cheque vs Demand Draft
Businesses and individuals use a number of payment mechanisms to transfer funds, settle transactions and make payments. Most of these transactions occur through the aid of banks and financial institutions. Cheques and demand drafts are two such methods used for transferring funds and making payments. Despite them serving the same purpose, there are a number of differences between the cheque and the demand draft. The article examines each payment mechanism closely and highlights their features, similarities and differences.
What is a Cheque?
A cheque serves as an order made to a bank, directing the bank to pay a specified sum to a certain person from an account that is held under a specific name with the bank. Cheque facilities are offered to bank customers who hold a current account with the bank. The purpose of a cheque is to make payments to a party, to whom money is owed. Payment through a cheque is not guaranteed as a cheque can be dishonoured or stopped. A cheque is a negotiable instrument and is payable only on demand. This means that the bank cannot transfer/pay out the said funds to an account or individual unless the cheque is produced at the bank. The drawer of the cheque is the individual who is making the payment, and the payee of the cheque is the individual or party that receives payment by cashing in the cheque. Banks do not charge additional fees for providing the cheque facility.
What is a Demand Draft?
A demand draft is a payment instrument that is used in the transfer of funds from one bank to another branch of the same bank or to another financial institution. A demand draft guarantees that the payment is made to the payee (the person who receives the funds). The drawer of a demand draft is the bank who directly debits the issuer’s account with the specified amount. Banks charge a commission for drawing up and issuing a demand draft. The drawer of the demand draft is the bank, and the payee is the party receiving the funds.
What is the difference between Cheque and Demand Draft?
Cheques and demand drafts are both mechanisms that are used to make payments, settle transactions and to transfer funds to other accounts or individuals. The main difference between a cheque and a demand draft is that unlike a cheque that requires a signature to be cashed, a demand draft does not require a signature to transfer funds. While a cheque is issued by a person who has an account with a particular bank, demand draft is issued by a bank. A cheque can be written out to cash, to an individual, or drawn on a person who holds an account in another bank, whereas demand drafts are drawn on another branch of the same bank or another bank. A demand draft is guaranteed, therefore, it cannot be dishonored and funds are directly transferred from one account to another. Whereas a cheque can be stopped at request or dishonoured in the event that there are insufficient funds in the drawer’s bank account. A cheque can be paid out to the bearer of the cheque, which is not the case for demand drafts. Furthermore, a cheque is not backed by a bank guarantee whereas demand drafts are backed by bank guarantees and are, therefore, more secure.
Summary
Cheque vs Demand Draft
• Cheque and demand draft are both mechanisms that are used to make payments, settle transactions and to transfer funds to other accounts or individuals.
• A cheque serves as an order made to a bank directing the bank to pay a specified sum to a certain person from an account that is held under a specific name with the bank.
• Payment through a cheque is not guaranteed as a cheque can be dishonoured or stopped. A cheque is a negotiable instrument and is payable only on demand.
• A demand draft is a payment instrument that is used in the transfer of funds from one bank to another branch of the same bank or to another financial institution.
• A demand draft is guaranteed, therefore, cannot be dishonored, and funds are directly transferred from one account to another.
• The main difference between a cheque and a demand draft is that unlike a cheque that requires a signature to be cashed, a demand draft does not require a signature to transfer funds.
Further Reading:
- Difference Between Postal Order and Money Order and Cheque
- Difference Between Cheque and Bill of Exchange
- Difference Between Cheque and Promissory Note
- Difference Between Pay Order and Demand Draft