What is Cheque: Different Types of Bank Cheques

In the following sections, we will cover everything you need to know about these two payment methods. Learn more about the advantages and differences between cheques and demand drafts below. So, both the instruments, cheque and demand drafts have their own uses and limitations. To deal with millions of transactions on a daily basis, one can avail the benefits of a cheque, which is easy and convenient to issue. Conversely, when the amount needs to be transferred from one place to the another or if it requires a guaranteed payment; demand draft is the best option to go for. DD’s are generally used when one has to make payment in another city and it can be cleared at any branch of the same bank.

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These cheques have an extra layer of security which protects the cheque from en-cashing by allowing the payee to withdraw money only after the approval of the drawer. In contrast, a bank draft or Demand Draft is a payment guarantee that is provided by the bank only after the money has been collected from the payer. The bank is liable for payment to the payee in full, thus making the payment transaction safe and cannot be refused by the bank. While cheques have been a popular payment method for many years, they have several disadvantages that make them less preferable compared to other payment options. While cheques may not be the most popular payment method in today’s digital world, they still offer many advantages that make them a viable option for businesses and individuals. With their convenience, record-keeping capabilities, security, flexibility, lack of fees, and personal touch, they are a reliable payment method that should not be overlooked.

Types of cheque

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. The process involves drawing two parallel lines across the top left corner of the draft, which signals the bank to transfer the funds directly into the account of the person named on the draft. This is particularly useful in ensuring that the payment is secure and that the funds are used as intended.

What are the common mistakes while filling a demand draft form?

Both, DDs and cheques are negotiable instruments intended to make payments. To do this, promptly contact the issuing bank, submit a written request, and pay any applicable cancellation fees. You can directly request a demand draft from your bank by paying the required amount and any applicable fees. Yes, both need clearing time, but cheques generally take longer to clear than demand drafts. 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. Time Demand Draft is payable only after a specified period, providing more control over the timing of payments.

Reduced Fraud Risk as it is Non Negotiable

Demand drafts were originally designed to benefit legitimate telemarketers who needed to withdraw funds from customer checking accounts using their bank account numbers and bank routing numbers. Cheques and demand drafts are distinct payment instruments with difference between cheque and dd their own advantages and disadvantages. Cheques are widely used, offering convenience and flexibility, but they may involve delays, security risks, and limited acceptance.

This makes crossed demand drafts a preferred choice for large transactions and payments that require an extra level of precaution. Since demand drafts are prepaid and issued by a bank, they ensure that the payment is made, reducing the risk of insufficient funds. In contrast, cheques depend on the issuer’s account balance at the time of encashment, which means they can bounce if there are insufficient funds. Additionally, both cheques and demand drafts can be crossed with two parallel lines to ensure that the payment is deposited into the payee’s bank account, providing an extra layer of security. Cheques come in various types, each designed to cater to specific needs.

These drafts were trusted as a secure method long before the advent of modern electronic banking! Cheques are primarily used for routine transactions, such as salary payments, bill settlements, and personal transfers. They are also favoured in formal and official dealings requiring assured payment. Because a demand draft is a prepaid instrument, payment cannot be stopped, whereas payment of a check may be denied for insufficient funds. After the draft matures, the owner of the other company brings the demand draft to his bank and collects his payment, making him the payee. Therefore, both of these instruments, cheques and demand drafts have their own sets of advantages and disadvantages.

• Here, the role of the drawee bank is like a guarantor, which assures the release of payment on presentment of the document or collect the money from his/her bank via clearing mechanism.
• They are particularly suitable for secure, large transactions or when a verifiable payment is necessary.
• Open cheques allow the payee to encash the cheque at the bank, while crossed cheques restrict the payment to a bank account.

Knowing the distinct features of each can help you decide which option is more suitable for your transactions. A demand draft, often abbreviated as DD, is a type of financial instrument issued by a bank or financial institution. It is a pre-paid negotiable instrument, similar to a check, used for making payments. Demand drafts are considered a secure and reliable method of transferring funds, especially for large amounts or when a high level of certainty is required in the payment process. Demand drafts are usually chosen by the government and educational establishments since they have a monetary value and they are the safest method to receive payments. Before releasing the draft, the drawer must pay the stipulated amount to the bank, which serves as an assurance for the pledged funds.

A demand draft is also a negotiable instrument, but is payable in full on demand. If a draft is lost or stolen, the process to stop payment and request a new draft can be time-consuming and may incur additional costs. 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. Demand drafts offer a high level of payment security as the bank guarantees the amount. The payee does not need to worry about insufficient funds or cheque bounces.

• A Sight demand draft is payable quickly and is commonly used when acquiring items on the foreign market is known as a site demand draft.
• They are commonly used for making large payments, such as for buying property or paying college fees.
• It is issued by the user itself which deals with postpaid payment of often results in the bounce of cheque.
• For instance, the local drafts usually have lesser charges while the outstation ones are charged more because of the extra processing involved.
• Writing and depositing cheques can be cumbersome, requiring physical handling, especially when compared to online payment methods

The clearing time for a demand draft can vary depending on factors such as the banks involved and the method of presentation. It typically takes several business days for the demand draft to clear and for the funds to become available to the payee. The exact time frame can depend on the policies and processes of the banks involved. As noted above with wire transfers, demand drafts may be more suitable for more select types of transactions as opposed to online payments which may be used much more broadly. While demand drafts often incur transaction fees, more and more online payment systems may also offer free transactions for certain transfers or within specific limits. This may be free transactions based on the number of quantities or free transactions based on the size of the transaction.

Be sure that your signature is the same as the one you provided to the bank. Whether you’re an aspiring entrepreneur, trader, or just someone keen on financial growth, our comprehensive insights on personal development, finance, and leadership are tailored for you. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Demand drafts are non-negotiable, and the person or entity named in the draft can encash it, reducing the risk of fraud or misuse.

It is why they are also referred to as non-negotiable financial instruments. However, this can be done only once and across a period of 365 days from the date on which the cheque was issued. A banker’s cheque clearing time does not exceed more than twenty-four hours after being deposited. This is because it is guaranteed by a financial institution instead of being issued against a person’s bank account. In other words, the funds have already been secured by the bank before the demand draft is issued.

They are a secure form of payment that is widely acceptable and easy to issue. Furthermore, they carry no transaction limits and provide proof of payment anytime you use them. It is to be noted that, when the payment is to be made to a third party, the drawer and payee of the cheques are two different persons.