Definition: A bank draft, also called a bank check, is a method of payment that involves a document issued by a bank guaranteeing that the amount stated on the certificate will be paid to the recipient of the document. A bank draft is used as a type of check which is more reliable than a personal check as it is backed by the bank itself on behalf of the payer; hence, it ensures that the person who the draft is addressed to, will receive the money.
What Does Bank Draft Mean?
This kind of check is usually employed when the amount of money being paid is large, or when the two parties do not know each other that well. Therefore, a secure form of payment is required to complete the transaction. Drafts are also used when one of the parties does not accept personal checks in doubt that the funds may not actually be available.
A bank issues a bank draft when one of its depositors (a person who holds an account in such bank) requests one using the following steps. First, the bank checks to depositor’s account to make sure the funds are available for transfer. After the funds have been validated, the bank transfers the money from the depositor’s account to the bank. This is what makes these drafts more reliable than other forms of payments; as the bank already has the money that will be paid and the document is backed by a reputed financial institution. The draft is then issued and handed to the client who will afterwards deliver it to the seller or recipient.
These drafts are commonly used as method of payment for real estate transactions or used vehicle purchases.
Let’s look at an example.
Example
Octavio is looking to purchase a used car for his son, as he recently turned 18 years old. He negotiated with Mr. Thompson to buy his 2014 Hyundai Accord. Since Mr. Thompson doesn’t know Mr. Octavio, he doesn’t want to take a risk that Mr. Octavio’s personal check not clear, so he requires Mr. Octavio to pay with a bank check. In order to settle the transaction, Mr. Octavio asked his bank to issue a bank draft for $8,000 to pay Mr. Thompson.
