If you need to transfer a significant amount of money securely, a demand draft is often the better option, as it reduces the risk of non-payment. On the other hand, cheques are more flexible and convenient for everyday transactions but carry a higher risk if the drawer’s account lacks sufficient funds. Demand drafts are ideal for situations where security, reliability, and guaranteed payment are essential. They are commonly used for large financial transactions, such as paying educational fees, purchasing property, or making significant business payments. The added security of crossed demand drafts makes them particularly useful when dealing with unknown parties or when the payment needs to be securely deposited into the payee’s account.
While both cheques and demand drafts are used to transfer money, the key difference between demand draft and cheque lies in how they are processed. A cheque is issued by an individual and requires the issuer’s signature, which means the payment can be stopped or canceled. In contrast, a demand draft is a prepaid instrument issued by a bank, guaranteeing that the payment is made since the amount is already deducted from the issuer’s account. Additionally, using crossed demand drafts offers added security by ensuring the funds are deposited into the payee’s bank account. Demand drafts offer several advantages, making them a preferred choice for secure financial transactions. Unlike cheques, demand drafts are prepaid and issued by the bank, which guarantees that the funds are available and the payment will be made.
Are cheques and demand drafts subject to clearance periods?
Both demand drafts and cheques may incur fees, but they differ in nature. Issuing a demand draft usually involves a fee that is based on the amount of the draft, and additional charges may apply for services like courier delivery. In contrast, cheques generally do not have issuance fees, but fees may be charged for special services like stopping a cheque or for cheques that bounce due to insufficient funds. Draft cancellation may also incur difference between cheque and dd fees if you need to cancel a demand draft after issuance.
This might be a secure payment method type in demand draft section as it provides the facility for the drawer as the payee has to present some document to the bank along with the draft. There are several ways including cash to transfer the money to other user’s hand but we gonna discuss the main highlights on the major difference between cheque and demand draft. Dishonour of a cheque due to insufficient funds in the issuer’s account is regarded as a criminal offence. A ‘Cheque Return Memo‘ is issued by the drawee bank to the payee bank, signifying the cause for non-clearance of the cheque, which the payee’s bank gives to the payee along with the bounced cheque. Some international deals, particularly the import-export segment, necessitate the use of these demand drafts.
Trinka’s Enterprise solutions come with unlimited access and great customization options to all of Trinka’s powerful capabilities. As regards payment, the term “pay cheque” is widely used in Canada and also in the UK. It is a document that is issued by an employer to send wages or salaries. Conversely, in American English, it is more common to use the spelling “paycheck.” The difference is one of regional linguistic use but means essentially the same. Whether spelled that way or not, both indicate getting pay for work done. They also need mandatory information such as the payer’s signature and date.
FAQs on Difference Between Cheque and Demand Draft
In other words, the funds have already been secured by the bank before the demand draft is issued. Therefore there is no risk of the demand draft not being cashed by the bank. Cheques are convenient for everyday transactions and do not usually incur fees. Demand drafts are better for high-security payments, especially when guaranteed payment is required, as the bank issues them with no risk of bouncing. Cheques offer various advantages over demand drafts for the payer (drawer).
Demand drafts are mostly used for larger transactions or payments where security is essential. For smaller or routine payments, cheques or electronic transfers are often preferred due to their convenience. However, they carry a higher risk of bouncing if the issuer’s account lacks sufficient funds, which can lead to delays and additional charges. These open cheques can be transferred to the payee to his/her bank account directly. These cheques do not have the two parallel lines cut on the top left side of the cheque.
Disadvantages of Demand Draft
The withdrawing bank becomes the guarantor and assures payment release after the clearing mechanism. Moreover, the person requesting a DD does not need an account with the bank. Cheques are more common for personal and business transactions, while demand drafts are often used for secure payments, especially when the payee needs guaranteed funds. It is issued by the bank in favour of the recipient to transfer money from one bank branch to another, located outside the city.
What Is A Demand Draft?
This method ensures that the payment reaches the intended recipient securely, reducing the risk of fraud or misappropriation. A cheque is a financial instrument issued by an individual or business to instruct their bank to pay a specific amount of money to the person or entity named on the cheque. It acts as a written promise to pay, allowing the payee to withdraw funds from the issuer’s bank account.
The cash cannot be realised until and unless the check is presented to the bank within a reasonable time. What’s more, the availability of the account is a prerequisite for cashing checks. Yes, both need clearing time, but cheques generally take longer to clear than demand drafts. Banks charge a fee for issuing demand drafts, increasing the overall amount of the draft. This makes it less cost-effective for frequent or small-value transactions.
To a layman, there is no significant difference between these two, but actually, these two modes of payment differ in a number of ways, which we have discussed in this article in detail. In demand draft, drawer and drawee are basically two different branches of the same bank, however, the payee is the third party, to whom the payment is to be made. No matter whether you’re sending or receiving payments, clarity matters. Having the capability to identify these differences, you’ll navigate banking and financial discussions like a pro. Welcome such information to facilitate easy communication in all your transactions. A time demand draft has a predetermined pay time in the future and is not payable right away.
They provide a handy way to pay bills or make purchases without having to carry money. The convenience of this requires both terms in contemporary finance in various cultures and contexts. Banks may also produce a duplicate demand draft in the event of a lost or misplaced DD. The bank charges a nominal fee and invalidates the previous draft before issuing a new one. The institution can release a demand draft of ₹5,000 or lower on the premise of acceptable indemnification without getting Non-Payment Advice.
How are the payment processes different?
This type of cheque can be used to pay a specific organization or a person. These cheques can be availed by the persons whose names specified in the cheque. Always remember cheque does not mean cash because it does not infer certainty of payment. Unless the cheque is not presented before the bank, within a reasonable time, proceeds cannot be realized. Further, the availability of funds in the account is a precondition for payment of the cheque.
- Since the funds are already paid to the bank, the payment process is quick, especially with sight drafts, where the payee can claim the funds immediately upon presentation.
- Unlike cheques, demand drafts cannot be stopped or canceled, ensuring that the funds will be transferred once the draft is issued.
- Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
- The guidelines state that you can issue DDs for over ₹20,000 with account payee crossing.
Cons of Using a Demand Draft
- With advancements in technology and digitalisation, the majority of banking operations are paperless now.
- It is always pre-printed with the words ‘not negotiable’ which means it cannot be further negotiated.
- They are highly exposed to threat as anyone can claim to withdraw funds.
- When a demand draft is crossed, it means that the draft can only be deposited into the payee’s bank account and cannot be encashed at the bank counter.
- A cheque is processed by the payee depositing it into their bank account, after which the bank verifies the issuer’s account balance before transferring the funds.
The purchaser can employ a sight demand draft to promptly transfer money to the seller, allowing the vendor to transfer ownership to the purchaser swiftly. A cheque is known as a negotiable security because it can be exchanged for cash. At the same time, we can negotiate it by endorsement, the payment of which is usually made on demand i.e., only post presenting the cheque to the bank. Cheques are not cashed if the payer doesn’t have enough funds in his/her bank account. You need to remember that cheques are not the same as cash because a cheque, no matter from whom it is, doesn’t guarantee payment.