What Is a Bank Draft?
A bank draft (which SoFi doesn’t offer at this time) is a document that looks like a check, but the payer’s bank guarantees the funds, making them extremely reliable. Since bank drafts have no 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 no worry about a bounced check or handing over piles of physical cash. Here’s how a bank draft works and what to expect when you use one.
Key Points
• Bank drafts are secure financial tools that are guaranteed by the issuing bank, and cannot bounce.
• There is no limit on the amount of a bank draft, which can make them ideal for significant purchases, such as cars.
• Bank drafts can be requested from a bank and typically have a fee of up to $10.
• Bank drafts are physical documents that can be lost or stolen, and are difficult to cancel.
• Alternatives to bank drafts include ACH payments, wire transfers, and money transfer apps.
Bank Draft Definition
A bank draft is a financial instrument used to make payments — frequently large ones — that have your bank’s financial backing. Bank drafts look like typical checks but 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, say, ATM withdrawal limits.
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 fee of $0 or $10 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, 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 best suited 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 your account has sufficient funds for the bank draft and moves the money from your account into its reserve account. This way, they 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 they 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 amount 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
First, the advantages of bank drafts:
• 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 thousands of dollars in cash.
• Bank drafts can’t bounce since your financial institution guarantees the payment.
• Bank drafts have no limit in terms of the amount.
• Therefore, they’re helpful 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 beyond.
As you can see, bank drafts can be a very useful tool to make a large payment.
Cons
Next, the downsides of bank drafts:
• Your financial institution might charge you to issue a bank draft.
• The bank draft isn’t an electronic transfer; it’s a physical document you must deliver to your payee.
• Since it’s a physical document, your bank draft might become lost, stolen, or damaged.
• It’s typically impossible to cancel a bank draft and receive a refund.
• It may be challenging (but not impossible) to recover your money if it is lost.
• Fees could be higher than other methods.
In these ways, there are some negative aspects to bank drafts that may mean they are not appropriate for every situation.
Canceling a Bank Draft
Generally, you can only cancel a bank draft in dire situations. Theft or fraud are usually the only reasons a financial institution will cancel a bank draft. However, your financial institution may have a policy stating they 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 usually free but may have transfer limits. Also worth noting: They are solely for domestic transactions.
• You could use a wire transfer, another electronic payment type that usually completes the payment within 24 hours. As with ACH payments, wire transfers have limits, such as $10,000 or $100,000. However, wire transfers are 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 to have the necessary funds in your account, is another possibility.
• Money transfer apps, including such P2P platforms 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, making their use seamless and convenient. 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 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, a vehicle, or the purchase of 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 that are subject to damage or theft, it’s best to handle them carefully and perhaps consider alternatives, such as electronic payments.
FAQ
How long does it take for 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 timing if you are 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 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; typically, the cost is $10 or less.
Does a bank draft require a signature?
Neither the issuer nor the payee need to provide a signature for a bank draft. The sole party that signs a bank draft is an employee of the issuer’s bank or financial institution.
Photo credit: iStock/deepblue4you
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
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