When it comes to making payments, people have different options at their disposal, including cheques and demand drafts. These two payment instruments have been around for a long time and are still widely used today. In this article, we will explore the complete differences between cheques and demand drafts, their types, advantages, disadvantages, and which one is best suited for different scenarios. So let’s first have a look at a table comparing both cheque vs demand draft in a great manner.
Cheque Vs Demand (Comparison Table)
| Cheque | Demand Draft |
|---|---|
| A cheque refers to a written order or document directing the bank to pay a specific amount of money to the person or organization named on the cheque. | A demand draft refers to a written order or document issued by a bank, directing another bank or its own branch to pay a specific amount of money to the person or organization named on the demand draft. |
| It is issued by an individual or an organization i.e the customers of the bank. | It is only issued by a bank at the request of a person. |
| In the case of a cheque, the drawee is the bank on which the cheque is drawn. | For a demand draft, the drawee is another bank or the bank’s own branch, which is responsible for making the payment to the payee. |
| In the case of a cheque, there is no guarantee of payment as the cheque can bounce if the account on which the cheque is drawn does not have sufficient funds, if the cheque is post-dated, or if it has been reported lost or stolen. | With a demand draft, there is a high degree of payment guarantee as the bank issuing the draft provides a guarantee of payment to the payee. |
| A cheque can be lost, stolen, or bounced. | It is more secure and less prone to fraud. |
| Banks may charge fees for issuing and processing cheques. | Banks charge fees for issuing a demand draft, and usually charge additional charges for re-issuing and other processes related to demand draft. |
| It is suitable for small transactions. | It is suitable for large transactions and for payments made outside the country |
| It can be dishonored. | It cannot be dishonored. |
What is a cheque?
A cheque is a written order instructing a bank to pay a specific amount of money from the account of the person who issued the cheque to the person named on the cheque. A cheque can be issued by an individual, a company, or an organization. To issue a cheque, one needs to have a bank account, and the person or organization to whom the cheque is being issued must have a bank account as well.
Pros and Cons of a Cheque
One of the advantages of using a cheque is that it is a convenient way of making payments. Cheques can be issued from anywhere, and they do not require the physical presence of the person issuing the cheque. This means that one can pay bills or make purchases from the comfort of their home or office.
Another advantage of using a cheque is that it provides a record of the transaction. When a cheque is issued, it is recorded in the bank account statement of the issuer, which can be used as proof of payment in case of a dispute.
One disadvantage of using a cheque is that it can be easily lost or stolen. If a cheque falls into the wrong hands, it can be cashed or deposited into someone else’s account, causing financial loss to the issuer.
What is a demand draft?
A demand draft is a payment instrument that is similar to a cheque. However, a demand draft is issued by a bank instead of an individual, and the bank guarantees payment to the person named on the draft. In other words, when a bank issues a demand draft, it is promising to pay the amount specified on the draft to the person named on the draft.
Pros and Cons of a Demand Draft
One advantage of using a demand draft is that it is a secure way of making payments. Since the bank guarantees payment, there is no risk of the draft bouncing or being dishonored.
Another advantage of using a demand draft is that it can be used to make payments outside the country. This can be helpful for businesses that have customers in other countries.
One disadvantage of using a demand draft is that issuing a demand draft can be expensive as banks charge a fee for issuing them. The fee charged for a demand draft varies from bank to bank and depends on the amount of the draft.
Key Differences Between Cheque and Demand Draft
While comparing cheque vs demand draft, here we have included some of the key differences between both in order to understand them more clearly.
The main difference between a cheque and a demand draft is that a cheque is issued by an individual or an organization and is drawn on their own account, while a demand draft is issued by a bank and is drawn on the bank’s account.
Types of cheque
There are different types of cheques, including bearer cheques, order cheques, crossed cheques, open cheques, post-dated cheques, stale cheques, and traveler’s cheques.
- A bearer cheque is payable to the person who presents the cheque to the bank.
- An order cheque is payable to a specific person or organization named on the cheque.
- A crossed cheque has two parallel lines drawn across its face, indicating that the cheque can only be paid into a bank account and cannot be encashed.
- An open cheque can be encashed by the person named on the cheque.
- A post-dated cheque has a future date on it, and the bank cannot cash it until that date.
- A stale cheque is a cheque that is more than six months old and may not be accepted by the bank.
- Traveler’s cheques are used for traveling and can be replaced if lost or stolen.
Types of Demand Draft
- A sight demand draft is a type of demand draft that is payable immediately upon presentation to the bank. In other words, the person named on the draft can receive payment as soon as they present the draft to the bank.
- A time demand draft, on the other hand, is a type of demand draft that is payable after a certain period of time, usually a few days or weeks. The person named on the draft cannot receive payment until the specified time has passed. This type of demand draft is often used for transactions where payment is not required immediately but at a later date.
Which one should be used?
The choice between using a cheque or a demand draft depends on the situation. If the payment is small, then a cheque may be more suitable, as the fees for issuing a demand draft may be higher. However, if the payment is large, then a demand draft may be more appropriate as it provides a guarantee of payment.
Furthermore, if the payment is to be made outside the country, then a demand draft is the best option. On the other hand, if the payment is to be made within the country, then a cheque may be more suitable, especially if the person or organization being paid accepts cheques.
Conclusion
In conclusion, cheques and demand drafts are both payment instruments that have been around for a long time and are still widely used today. They have their advantages and disadvantages, and the choice between using them depends on the situation. While cheques are convenient and provide a record of the transaction, they may be lost or stolen. Demand drafts, on the other hand, are secure and provide a guarantee of payment, but may not be suitable for small transactions. Ultimately, the choice between using a cheque and a demand draft depends on the specific circumstances of the payment being made.
