My colleague Rahul was finally able to finalize his dream house after months of searching and negotiating. Despite the seller finally agreeing to the deal, one condition was imposed: no checks or online transfers would be accepted owing to security concerns. A digital payment enthusiast by nature, Rahul was in quite a dilemma. How would he ensure that payment was foolproof and guaranteed? That’s when his bank suggested a demand draft. He was curious and asked, what is a demand draft and how does it work? If you have found yourself in a similar situation, this blog is for you.
Demand Draft Meaning
A demand draft is a pre-paid financial instrument issued by banks guaranteeing the payment to the recipient. The demand draft is different from a cheque in that a bank collects the money from the issuing party before any processing is done. This gives a demand draft relative safety and security in large transactions, educational fees, and official payments.
A demand draft meaning can be simply understood as a written order given to a bank to pay a particular sum to a specified individual or organization. Since it is prepaid, this instrument carries no risk of non-payment and thus it is a preferred means for safe transactions.
How Does a Demand Draft Work?
Now, let’s return to Rahul's story. He issued a demand draft by visiting his bank. The bank debited the amount from Rahul's account (or accepted cash) and issued the draft, which the seller could then deposit in its bank and obtain payment without risk of rejection.
The bank accepts the money upfront when you request a demand draft, guaranteeing that the beneficiary is paid on time and without any issues. For this reason, a lot of institutions, universities, and businesses favor this form of payment over checks.
Types of Demand Drafts?
While the concept remains the same, demand drafts can be distinguished from each other according to the following purposes:
Sight Demand Draft- Payable only after necessary verifications of the documents.
Time Demand Draft- Payable as on or after the specified date.
The type of demand draft depends on the type of the transaction as it is arranged by the recipient.
How to Get a Demand Draft?
Getting a demand draft is an easy procedure. Here is how you can get it:
- Go to Your Bank: Visit the closest branch of your bank.
- Fill Out a Form: Enter the details like the payee's name, the amount, and your account details.
- Payment: The bank will either deduct the amount from your account or accept cash payment if you do not have an account with them.
- Receive the Demand Draft: The bank will give a physical draft with all the information mentioned.
- After it is issued, the demand draft can be handed over to the intended recipient, who can deposit it into his or her account for payment clearance.
Demand Draft Charges
Well, one thing to consider before you go for a demand draft is the cost attached to it. All banks usually charge a bank fee for issuing a demand draft depending on the amount and also on the charging policies of different banks. These fees on demand drafts usually include: -
- One-time processing fee
- Applicable GST
- Add-on fees for higher-value drafts
For example, a bank may charge Rs. 50 for drafts up to Rs. 10,000, and a percentage-based cost for larger sums. It is usually important to verify with your bank ahead of time to determine the demand draft charges that will apply to your transaction.
Why Choose a Demand Draft Over Other Payment Methods?
In case you were thinking why someone would use a demand draft when everything is practically available in the form of an online transfer, here is a brief overview of its benefits:
- Guaranteed Payment: Demand drafts cannot bounce, unlike cheques, making the process more reliable.
- Can be used for official transactions: Many government departments, universities, and companies require the payment to be made through a demand draft.
- No bank account needed: A demand draft can be obtained even by a person who does not have a bank account, simply by paying in cash.
Safe for large payments: Lower chances of being a fraud or robbed as compared to carrying cash.
Final Thoughts,
A demand draft is one of the most secure methods of transferring money whether you are paying college fees, renting property, or transacting with businesses. It removes the risk of not receiving payment, thus becoming a trusted financial method. Since you now know what is demand drafts, the process through which demand drafts work, and demand draft charges, you can confidently use them as needed. Now you will not have to worry when someone asks, "What is demand draft and why is it important?" you’ll have all the answers ready!
