If you’ve ever gone through the process of completing a big ticket purchase, you might have utilized a bank draft from your financial institution. And if you haven’t gone through this process before? Don’t worry – we’ll cover everything you need to know in this article from what is a bank draft in Canada to how much it costs to use the service.
Table of contents
- What is a bank draft and how does it work?
- What is the purpose of a bank draft?
- What is the difference between a bank draft and a certified cheque in Canada?
- How long does a bank draft take to clear in Canada?
- Is there a charge for a bank draft?
- Can a bank draft be deposited in any bank?
- Key Considerations When Using Bank Drafts
To get started, a bank draft is a specialized type of payment. In many ways, a bank draft is sort of a special cheque. The bank provides an additional layer of assurance to the recipient of the funds by placing the money in a separate account until the bank draft is cashed. Ready to learn more? Continue reading to understand the ins and outs of bank drafts in Canada.
What is a bank draft and how does it work?
In technical terms, a bank draft is a form of payment where funding is guaranteed by the issuing financial institution. Using a bank draft is like asking the bank to write a cheque for you using your own funds to cover the cost.
To prepare a bank draft, the financial institution verifies and withdraws funds from the requestor’s account. Then, the funds are deposited to an internal account to cover the amount of the draft. When the bank draft is cashed, the funds in the internal account are used thereby guaranteeing the amount will clear.
Is a bank draft the same as a cheque?
A bank draft is similar to a cheque, but they’re not the same. Bank drafts and cheques are similar because they’re both physical pieces of paper that are presented to a bank to transfer funds from one account to another. But on the contrary, when someone issues a cheque, it is their responsibility to guarantee the funds are available in the account – not the bank’s. If the funds aren’t available, the cheque can bounce and the issuer usually incurs a non-sufficient funds (NSF) fee.
Bank drafts bypass this problem. The issuing bank will guarantee the funds are available to cash a bank draft by holding the funds in an internal, separate bank account. This provides an additional layer of assurance to the buyer that the funds are available and a purchase will be complete.
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What is the purpose of a bank draft?
Often, bank drafts are used when there is no existing relationship between a buyer and seller and the transaction is substantial. Picture yourself trying to sell a big asset to a stranger – you would probably want some additional assurance the payment will clear, right? After all, cheques bounce and wires take time to process – many forms of payment can be unreliable or timely. Not to mention, fraud is at an all time high. A bank draft provides additional assurance to the seller that payment will clear.
A common example of when a bank draft is used is for down payments on property. Usually, the relationship between a buyer and a seller in real estate is facilitated by a realtor. In other words, the seller may want some additional assurance the buyer’s form of payment is legitimate. For this reason, the seller may request the down payment, which is substantial in value, be given in the form of a bank draft.
What is the difference between a bank draft and a certified cheque in Canada?
A certified cheque is not the same as a bank draft, but they do share some similarities. With a certified cheque, the financial institution has guaranteed the availability of funds and the signature. Furthermore, the funds to be transferred are frozen until the certified cheque is cashed. In essence, the bank provides verification that the cheque is legitimate and is a proper form of payment.
However, a certified cheque does not involve the bank holding the funds in an internal account like a bank draft. For this reason, bank drafts have a bit more security and assurance compared to a certified cheque.
So when should you use a certified cheque and when should you use a bank draft? Since the two forms of payment are similar, you might be wondering when to use what. In general, bank drafts are used for big ticket purchases. Whereas certified cheques might be used for important transactions that aren’t as material – such as first and last for an apartment.
Keep in mind that some banks no longer offer certified cheques, but bank drafts are still common. With technology, cheques have become a less popular form of payment. Between platforms like PayPal and payment methods like electronic fund transfers, not as many people still use cheques.
What is the difference between a bank draft and cheque?
A cheque provides even less assurance than a bank draft or certified cheque. A cheque is only guaranteed by the account holder via a signature. The recipient has no assurance that the funds are available and the transaction will clear – they will find out when they cash the cheque.
With that in mind, cheques are still regularly used. Often when a buyer and seller have an existing relationship, a cheque is considered a reliable form of payment. The seller can trust the buyer has the funds available and the cheque will clear.
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How long does a bank draft take to clear in Canada?
As soon as the bank draft is cashed, the transaction is cleared instantly. The funds in the internal account are transferred immediately to the recipient’s bank account. This is precisely why they are used in instances where the seller doesn’t have an existing relationship with the buyer.
Unfortunately, this means bank drafts cannot be canceled. Once a bank draft is in the recipient’s hands, you can consider the transaction complete. This is important to consider because a cheque payment can be stopped even when you are no longer in possession of it. Be sure to do your due diligence and affirm your purchase decision before handing over a bank draft!
Is a bank draft as good as cash?
In many ways, yes, a bank draft is essentially a piece of paper that represents cash. But what if you lose a bank draft or the document gets damaged? Don’t panic – this doesn’t mean your money is lost forever. The first thing to do is contact your bank. You can request they reissue the bank draft and cancel the old one. They will have to verify that the funds are still available and solvent, but otherwise they will just reissue the bank draft.
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Is there a charge for a bank draft?
Yes, there is a charge to use a bank draft. The bank charges a fee for the additional work they put in to verify and set aside the funds attached to a bank draft.
How much does a bank draft cost?
Below are bank draft costs with popular financial institutions in Canada. These should give you a good idea of how much they can cost, but the exact amount will depend on your specific bank. Check their website or give them a call to get an exact number of how much bank drafts cost.
|Financial Institution||Bank Draft Cost||Refund/Lost Bank Draft|
|TD||$9.95||$10 when drawn in US or CAD currency|
$22 when drawn in another currency
|CIBC||$9.95||$0 when drawn in CAD currency|
$25 when drawn in US or another currency
|Scotiabank||$9.50||$12.50 if details are complete|
$20 if details are incomplete
$10 to $15 if cheque is in US or foreign currency
|BMO||$9.95||$12.50 for individual payment|
$20 for series of payments
|RBC||$9.95||$12.50 via online banking|
$25 via branch or telephone
|National Bank||$9 for US and CAD currencies|
$12.50 for foreign currencies over $5,000
|$10 for CAD currency over $100|
$16 for USD currency over $100
$25 for foreign currency over $100
$10 for all bank drafts $100 or less in any currency
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Can a bank draft be deposited in any bank?
Yes, bank drafts can be deposited at virtually any bank. This includes foreign banks in the United States and anywhere else in the world. However, in these instances, the bank draft is usually prepared in the currency of the destination country.
The process of depositing a bank draft is similar to a cheque. The recipient will take the draft to their bank and deposit it with a teller. You might also be able to deposit a bank draft online or at an ATM.
Key Considerations When Using Bank Drafts
Bank drafts are a useful tool when completing big ticket purchases. Often, the cost of using the service is quite nominal compared to the overall cost of what you’re buying. If you ever have to use a bank draft, be sure to handle the document with care because the last thing you want is the hassle and additional cost of replacing the document. For smaller less significant purchases, you can use a cheque or a certified cheque instead of a bank draft.
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