What is a bank draft?

29 September 2021 by National Bank
A couple of new homeowners hug after taking possession of their home.

A bank draft is a handy tool for making a big payment without having to take cash out of your account. Here’s why you would use one and how it works. 

What is a bank draft?

A bank draft is a payment instrument that carries a guarantee of funds from your financial institution. It’s a paper document that looks a lot like a regular cheque. The main difference is that someone who receives a bank draft has a guarantee that the funds are available, as opposed to a regular cheque, which could bounce. Bank drafts are made out to the person receiving the money. Your name and the amount will also appear on the draft.

Bank drafts can be used in Canada or abroad to make a payment and finalize a transaction. They can be made out in the currency of your choice. 

Good to know: There are two parts. The first part is “negotiable”. It’s important to treat it like cash. That’s the part that you give to the person you’re paying. The second part is “non-negotiable.” It’s a bit like a receipt: it contains the details of the transaction. Keep it for your files, separately from the negotiable part, since you can use it if the bank draft is lost or stolen. 

What’s the difference between a bank draft, a certified cheque, and a money order?

Although the three payment tools are visually quite similar, there are some differences. With all three, the money is guaranteed by an institution.

  • Money order: Can be used for amounts up to $999.99. You get them from the post office and the money is guaranteed by Canada Post.
  • Bank draft: Made out by a financial institution that guarantees the funds after withdrawing the amount from one of your accounts. Bank drafts can be made out in foreign currencies.
  • Certified cheque: Similar to a bank draft, but the money isn’t withdrawn from your account. It’s simply “frozen” or “held” until the cheque is deposited.

When choosing which payment method to use, the main consideration is the amount of money you need to transfer. Bank drafts are generally recommended for big amounts, i.e., several thousand dollars. It also depends on what’s available. Some financial institutions no longer certify cheques. In which case you’ll need to opt for another form of payment.

How do I get a bank draft?

Getting a bank draft is easy. Here’s how: 

  • Go to your financial institution. The teller assisting you will verify your identity.
  • For businesses, some institutions accept emailed or faxed orders for bank drafts.
  • The bank teller will withdraw the money from your account and transfer it to one of the bank’s accounts. 
  • They will then prepare the draft and give it to you.

As always, you’ll need to be careful once you leave the bank, whether you’re holding cash or a document such as a bank draft, to avoid theft.

What are bank drafts for?

Bank drafts are useful for major purchases where a significant amount of money changes hands. For example, you could use a bank draft:

  • To make a down payment on a house
  • When buying a car from a dealer
  • For important transactions made through a notary
  • When making major purchases overseas (car, boat, artwork, jewellery, etc.)

Bank drafts don’t expire. However if you’re overseas, some financial institutions may refuse drafts that are several months old. So it’s best not to get them too far in advance.

How do you deposit a bank draft?

You deposit bank drafts the same way you would a cheque. That means you can deposit it: 

It can take a few days between when the money is withdrawn from your account and when the funds are available.

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What’s the advantage of using a bank draft?

Bank drafts provide the person receiving the funds with a guarantee that they’re available. They’re more reliable than a cheque, which can bounce due to insufficient funds. For the person making the payment, it’s easier and more convenient to give someone a bank draft than to carry around thousands of dollars in cash.

And unlike e-transfers, you don’t need the other person’s banking information.

What are the things to consider before buying a bank draft?

Your bank draft is irrevocable as soon as you hand it over in payment. After that, you can’t cancel it. Even if you realize you’ve been sold a lemon, you won’t be able to stop payment.

Canada Post and financial institutions don’t allow bank drafts to be sent by mail, since they could become lost in transit. If you have to send one to someone far away, it’s best to send it by courier and require a signature upon receipt.

If you need to send a large amount to someone in another country, e-transfers are another good option for sending funds anywhere in the world.

As with cheques, bank drafts can be forged. So you need to be careful to avoid fraud.

There are fees for bank drafts. For details, check your institution’s fee schedule.

What do I do if I lose a bank draft?

If you lose or misplace a bank draft you ordered or if it’s destroyed in a pair of pants that went to the dry cleaners, 

take the non-negotiable part to your financial institution, if you still have it. Your institution will check to make sure the draft hasn’t been deposited and that you’re still solvent, and will then issue you another one at your request. You’ll remain responsible for the previous draft and will be required to sign an agreement to that effect. That means that if the person you give the bank draft to loses and then finds it again, they can still deposit it, at your expense, even if you gave them a replacement bank draft.

It may be possible to trace the bank draft and buy back the non-negotiable part under certain conditions. But you’ll need to pay additional fees and wait several weeks for the transaction to be finalized. That’s why it’s so important to keep the non- negotiable part in a safe place.

How do I cancel a bank draft?

If you change your mind and decide not to make the purchase or if the seller cancels the sale, you can get a refund on your bank draft. All you need to do is bring both parts of the draft to your financial institution.

This often happens with businesses that put up money to bid on a job but don’t end up winning the contract.

How to prevent fraud

If you’re selling something and the buyer wants to pay with a bank draft, it will be hard to tell if it’s authentic on your own. To make sure the document you have in your hands is the real deal, contact the financial institution that issued the draft.

All in all, bank drafts are a handy payment method for making large purchases. Of course, there are other secure forms of payment in use these days, such as Interac e-Transfers. E-transfers have become a very popular option, but since every situation is different, you’ll want to weigh your options to determine which payment solution is right for you.

Want to buy a bank draft?

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Interac e-Transfer is a registered trademark of Interac Corp. and is used under licence. 

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