Difference between a Cheque and a Demand Draft

There are a number of financial products in the market today to help make transactions easier and safer. Two such popular products are cheques and demand drafts. While most may believe that these are one and the same, there are a few key differences. In this article, we shall explore the difference between cheques and demand drafts.

What Is A Cheque?

A Cheque (sometimes also called a check) could be defined as a financial instrument that's used to make payments to associated parties. It's not usually exclusively declared, rather withdrawn at a specific bank and/or paid on demand. 

A cheque must be presented to the bank by the recipient or owner for the purpose of payment. It stays valid only for 3 months.

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. 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. 

Cheques are not cashed if the payer doesn't have enough funds in his/her bank account. In which case, we'll call that cheque a bounced cheque.

What Is A Demand Draft?

A Demand Draft (or DD, for short), on the other hand, can be described as a prepaid financial instrument in which the bank that's supposed to withdraw the money is required to pay in full once the payee presents the demand draft to the bank in order to make the payment.

The bank withdrawing, assumes the role of the guarantor. The job of the guarantor is either guaranteeing the release of the payment after presenting the documents or recovering the money from his/her own account through something called the ‘clearing mechanism’.

Also important to note, the person who is requesting this change does not necessarily have to be the bank account holder. Anyone can fill out his/her DD form, pay and/or receive whatever involved fees in cash and/or check.

Demand Draft is often used when a payment needs to be made in another city and it can be cleared at any branch of the same bank.

Why And How Is A Cheque Negotiable?

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. 

Parties Involved In Cheque Withdrawal

These are the parties usually involved in cheque withdrawal procedures.

• Withdrawer: the issuer of the Cheque.

• Drawee:  This is the paying agent, that is, the bank where the cheque was drawn from.

• Payee: The person to whom the cheque amount is to be paid.

Always remember that when payments are made to or by a third party, that is, someone who isn't a part of the three aforementioned parties, then the issuer and payee of the check must be aware that he/she is two separate persons. Although, if the check is issued to you, the issuer and payee are the same person.

Features Of A Demand Draft

Following are the features of a simple demand draft 

• A Demand Draft application is valid for not more than 3 months, but it may be extended if required and requested. 

• A bill of exchange can be paid at any branch of the bank from which the draft is drawn.

• It is a prepaid instrument that won't disappoint the user.

• It is necessary for it to contain the branch manager's signature.

Parties Involved In Demand Draft Application

The people that are associated with a demand draft withdrawal procedure are : 

• Withdrawer: Bank or any other financial institution is to be called the Withdrawer.

• Payee: The person from whom the amount is to be sent.

Bill of exchange, issuer and drawee are basically two different branches of the same bank, whereas the payee is a third party to whom the payment is usually made.

Major Differences Between A Cheque And A Demand Draft

1. Contents

Following are the contents of a Cheque :

• Drawee's bank and branch name

• Drawer's name

• Date of issue

• Payee's name

• Drawer's account number

• Account type (savings account) bank account or checking account)

• Amount (both words and numbers)

• Issuer's signature

• Unique check number

• Bank's MICR code

• Contents of draft request

Draft request contains the following information :

• Date of issue

• Name of issuing bank and branch

• Beneficiary name DD

• Payer's bank's MICR code 

• DD number

• Amount of payment in words and numbers

• Name of bank and city of payee.

• Signature of General Manager and Branch Manager.
  
  2. Types

Following are the types of cheques :

• Bearer Cheque: Payment is made to anyone presenting the cheque to the bank

• Order Cheque: Payment is made only to the person whose name is specified

• Crossed Cheque: A cheque with two transverse parallel lines is made on the face of the cheque

• Uncrossed Cheque: An  open cheque that is made payable to the person carrying it

• Post-Dated Cheque: Cheques that carry a future date for encashment

• Stale Cheque: A cheque post-validity, i.e. 3 months

• Traveller’s Cheque: Cheque used while visiting a foreign country, due to different currencies

• Gift Cheque: Used as gifts or prizes, usually huge in size

• Mutilated Cheque: A torn or tattered cheque

• Blank cheque: A cheque with only the signature of the owner

Following are the types of Demand Draft : 

• Sight Demand Draft: This is the type of Demand Draft that is paid on demand, contingent on the submission of specifically requested documents at sight. Which means that the payment can be made only if the recipient has already submitted the required documents and the bank has confirmed that. Then and only then will it be cashed.

Therefore, both of these instruments, cheques and demand drafts have their own sets of advantages and disadvantages.

Convenient and easy to handle cheques are available to process more than millions of transactions on a daily basis.

Conversely, if you need to transfer an amount from one place to another or simply desire a guaranteed payment, cheques and demand drafts are your safest bets!