What Is a Bank Draft?

A bank draft is a document that looks like a check, but the payer’s bank guarantees the funds, making them very reliable. Since bank drafts have no value limit, their increased security makes them ideal for hefty transactions, such as purchasing a car. They are often used in business transactions as well.

Bank drafts can foster trust in a deal involving large sums of money, since there’s none of the hassle of a bounced check or handing over piles of physical cash. Learn how a bank draft works and what to expect when you use one.

Bank Draft Definition

A bank draft is a financial instrument used to make payments, usually large ones, that have your bank’s financial backing. Bank drafts look like typical checks, but they can’t bounce because the bank ensures the payment will go through, usually within 24 hours. In addition, bank drafts can be for any amount you like, unlike the situation with wrangling ATM withdrawal limits, for example.

You typically obtain a bank draft either by visiting a bank branch in person or making a request in writing. You’ll usually pay a $0-$10 fee to get a bank draft drawn on your checking account. While bank drafts technically don’t expire, financial institutions may refuse to process a bank draft that is more than a few months old.

Money Orders vs Bank Drafts

You can use both money orders and bank drafts to make payments, but these tools differ in several ways.

•   Money orders sent domestically must be less than $1,000, while bank drafts don’t have limits.

•   You must have a bank account to draw upon in order to get a bank draft, but you can get a money order from a bank, a U.S. post office, and select grocery stores and retail locations. Money orders are often bought with cash, a debit card, or a traveler’s check.

•   You can cancel a money order and get a refund if your payee hasn’t cashed it yet, but banks usually won’t cancel a bank draft.

Knowing these differences can help you determine which financial tool is most suitable for your situation.

How Do Bank Drafts Work?

To get a bank draft, you will typically follow these steps.

•   Ask your bank or credit union to issue a bank draft for the desired amount. You can do so in person at a branch or in writing.

•   Next, your financial institution confirms that your account has sufficient funds for the bank draft and moves the money from your account into its reserve account. This way, it can guarantee the bank draft, meaning your payee can be sure of receiving payment.

•   Lastly, your financial institution creates the physical document with the payee’s name on it. Typically, you get a bank draft in person at a branch, though it can also be obtained via mail.

Like ATM fees, your financial institution may charge a nominal fee for bank drafts (as noted above, typically close to $10). However, you might receive the first several bank drafts for free at your bank. In addition, using a specific number of bank drafts per month might eliminate the fee.

Pros and Cons of Bank Drafts

Bank drafts have pros and cons, just as checks, e-checks, money orders, and cash do. Keep the following in mind when using bank drafts.

Pros

The advantages of bank drafts are:

•   Your financial institution acts as the intermediary for the transaction, making the payment secure and convenient. It adds a level of trust.

•   A bank draft is safer than carrying around thousands of dollars in cash.

•   Bank drafts can’t bounce since your financial institution guarantees the payment.

•   Bank drafts have no limit on the amount.

•   Therefore, they’re useful for sizable transactions, such as a down payment for a home.

•   The Federal Deposit Insurance Corporation, or FDIC, insures most financial institutions, meaning the government will fulfill the bank draft’s value in the rare instance of a financial institution failing. This insurance covers up to $250,000 per depositor, per account category, per institution.

•   Bank drafts generally clear within 24 hours.

•   Financial institutions can usually convert bank drafts into the payee’s preferred currency, from U.S. dollars to euros and other currencies.

As you can see, bank drafts can be a helpful tool for making a large payment.

Cons

The downsides of bank drafts are:

•   Your financial institution might charge you to issue a bank draft.

•   The bank draft isn’t an electronic transfer but a physical document that you must deliver to your payee.

•   Since it’s a physical document, your bank draft might become lost, stolen, or damaged.

•   You can’t generally cancel a bank draft and receive a refund.

•   It may be challenging (but not impossible) to recover your money if it’s lost.

•   Bank draft fees may be higher than fees for other methods.

Hence, there are some negative aspects to bank drafts that may mean they are not appropriate for every situation.

Canceling a Bank Draft

Generally, a financial institution will only cancel a bank draft in dire situations, such as theft or fraud. However, your financial institution may have a policy stating that it won’t cancel bank drafts under any circumstances.

That said, if you want to cancel a bank draft for a reason other than theft or bank fraud, you could have the payee cash the bank draft and give you the money. This option requires trusting the payee to agree to and provide the refund.

Bank Draft Alternatives

While bank drafts may suit some payment scenarios, they are just one among many ways to send money.

•   One alternative to bank drafts is automatic clearing house (ACH payments. The ACH network allows banks, credit unions, and financial institutions to transfer funds to each other electronically. ACH payments are often free but may have transfer limits.

•   You could use a wire transfer, another electronic payment type that usually completes payment within 24 hours. As with ACH payments, wire transfers have limits, such as $10,000 or $100,000. Wire transfers are also viable for foreign transactions.

•   Checks are another option. Receiving a large sum via a standard check involves the risk of it bouncing, so payees may hesitate to accept this form of payment. You could pay for a cashier’s check from your financial institution. This means the bank uses its funds to guarantee the payment. A certified check, in which the bank verifies that you have the necessary funds in your account, is another possibility.

•   Money transfer apps, including person-to-person platforms such as PayPal and Venmo, are a financial tool that can offer speed and security as you move funds. (Instant accessibility may be available if the recipient pays a fee.) These apps may charge transaction fees and usually have daily transaction limits.

Money transfer apps link to your bank account, enabling their seamless and convenient use. However, depending on the app, your transaction might not have FDIC insurance, meaning a botched transaction could result in the permanent loss of money. In addition, the payer and payee need to have the same app to conduct a transaction.

As you can see, there are many ways to transfer funds if a payment by bank draft doesn’t suit your needs.

The Takeaway

A bank draft is a financial tool typically used for large transactions, such as the payment for a home, vehicle, or office equipment. The bank guarantees payment to the payee by using its own reserves after verifying and transferring the issuer’s funds into a reserve account, which adds a layer of security and trustworthiness. However, because bank drafts are physical documents that you can’t easily cancel and are subject to damage or theft, it’s best to handle them carefully and perhaps consider alternatives, such as electronic payments.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How long does it take for a bank draft to clear?

Bank drafts usually take 24 hours or less to clear because the payer’s financial institution guarantees the funds. However, the receiving bank may have its own policies about when it makes funds available to the account holder, so check with your financial institution about times if you’re receiving a bank draft.

Is a bank draft available immediately?

Bank draft funds generally become available within 24 hours of the payee depositing them. However, the payee’s financial institution might take up to a few business days to make the funds available, depending on its policies.

What do you need for a bank draft?

You need a bank account to issue a bank draft. In addition, you need your account to have funds equal to or greater than the payment amount. You may also need to pay a small fee for the bank draft, which is typically $10 or less.

Does a bank draft require a signature?

Neither the issuer nor the payee needs to provide a signature for a bank draft. The only party that signs a bank draft is an employee of the issuer’s bank or financial institution.

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