A bank draft is a secure payment method that's guaranteed by a bank or financial institution. It's usually used for transferring large amounts of money, such as a down payment on a house or purchasing a vehicle.
When you purchase a bank draft, the bank withdraws the amount of the draft from your bank account before putting it into a reserve account. The funds remain there until the draft recipient cashes the bank draft.
Our guide to bank drafts explains how they work, when you might want to use one, alternative payment options, and more.
Key Takeaways
- A bank draft is a guaranteed form of payment by the issuing financial institution.
- It’s used for large purchases or to provide security during a transaction.
- Once the payment has been deposited, the bank draft can’t be cancelled or reversed.
- Bank drafts typically cost between $7 and $10, but some accounts provide a limited number of them for free.
- Alternatives to bank drafts include certified cheques, money orders, and Interac e-Transfers.
How a bank draft works in Canada
A bank draft is a secure form of payment guaranteed by a financial institution. It looks and feels similar to a cheque or money order.
Here is how a bank draft works:
- Request a bank draft from your bank (usually for a fee)
- Your bank transfers the funds from your account to its own reserve account
- You'll receive a physical bank draft slip
- It's your responsibility to give the draft to the intended recipient
- Only the intended recipient can cash the bank draft
Bank drafts are used mostly for large purchases or to guarantee payment between buyer and seller.
Each bank has its unique design for its bank drafts – here is an example of what your bank draft may look like:
How much does a bank draft cost?
Generally, a bank draft in Canada costs between $7 and $10. However, some premium bank accounts include bank drafts for free or at a discounted rate – like the RBC VIP Banking and BMO Premium Chequing Account.
When to use a bank draft
Bank drafts are usually required when you're making a particularly large payment and the recipient requires assurance that you have sufficient funds to cover the transaction. There are several other reasons why you might need to use a bank draft as opposed to another form of payment.
Here are a few example situations that could require using a bank draft:
- Buying a car
- Purchasing real estate (making the down payment)
- Paying the security deposit on an apartment or rental property
- Making tuition payments
- Paying a legal settlement
- Making big purchases from overseas (boats, jewelry, etc.)
How to get a bank draft
Requesting and acquiring a bank draft is usually pretty simple – you head to your local bank branch and request one.
Here's a rundown of this process:
- You visit your bank and request a bank draft for a specified amount and recipient.
- The bank representative checks to make sure you have sufficient funds to cover the draft. The funds are then moved into a reserve account and held there until the bank draft is cashed.
- The representative issues you the paper slip that is the bank draft and charges you any applicable bank fees, which you pay.
- You take the bank draft and present it to the intended recipient.
- The recipient deposits the bank draft into their account, either at a bank machine, with a teller, or via online banking.
- After a period of 1 to 4 business days, the bank draft clears and the funds are available for the recipient to do with as they wish.
While most of us are used to completing much of our financial transactions online, this is one that often must be done in person, presumably because a bank representative needs to verify your identity. And, of course, this is much more safely and easily done if you're right there on the premises.
Exceptions are sometimes made for businesses, though. Email or fax requests for bank drafts from businesses are fulfilled at some banking institutions. You'll also be able to get one from an online bank by using your banking portal, though it'll need to be couriered to you (some allow you to transfer the funds to a bank of your choosing to get it faster).
How long does it take a bank draft to clear?
A bank draft from a Canadian bank or financial institution will usually clear in 1 - 4 business days.
An international bank draft may take up to 30 days to clear.
How to cancel a bank draft
It's nearly impossible to cancel a bank draft. The funds have already been withdrawn from your account and put into a reserve account, so, technically, the transaction has already happened.
There may be some leeway if the recipient hasn't cashed the draft yet. In this case, the bank can cancel it and refund your account.
You can replace a bank draft, but this could require a Bond of Indemnity – a written statement declaring that one party will reimburse the other for a loss that occurred due to a specific event.
Once a bank draft has been cashed, it's too late to cancel it.
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As with pretty much all financial products and tools, there are pros and cons to using a bank draft. It isn't always going to be the solution you're looking for, but there are certainly some interesting benefits.
Here's an overview of the main benefits and drawbacks of bank drafts:
| Pros | Cons |
|---|---|
|
|
Paying for a bank draft can be annoying, and the lack of ability to cancel can be nerve-wracking. But the convenience of being able to use multiple currencies and not having a dollar limit at all? These factors can make it worth the risk, depending on the situation.
Bank draft alternatives
Sometimes a bank draft's cons can outweigh the benefits and you'll need an alternative payment method – cheques are the most obvious choice, but not always the best.
Consider this table of other money transfer options and see how they stack up when compared to a bank draft:
| Alternative | Similarities | Differences | Usage examples |
|---|---|---|---|
| Certified cheque | * Guaranteed by the bank * Available in large amounts * A fee is charged * Can move large sums of money * Payment can't be stopped | * Issued by the payer, not the bank * Funds are put on hold, not withdrawn * Can take a bit longer to obtain | * Buying a used car * Making payments to collections agencies |
| Money order | * Guaranteed by the issuing institution * A fee is charged * Can move large sums of money * Risk of fraud | * Available from Canada Post as well as financial institutions * Only available up to $999.99 * Usually paid for in cash, so doesn't require a bank account * Can be refunded if uncashed * Usually available in limited currencies | * Sending a payment through the mail * You don't have a bank account |
| Interac e-Transfer | * A fee is charged * Can move large and small sums of money | * Sends funds instantly * No need to go to the bank * Amount is restricted to a daily and weekly limit | * Splitting a bill with other people * Sending money as a gift |
| Wire transfer | * Very secure * A fee is charged * Can move large sums of money * Must be done at a bank branch * Can't be reversed | * Transfers funds from one account to another (which makes it more secure) * You need to provide the recipient's banking info * Much higher fees | * Sending money to someone in another country * Sending large sums of money quickly |
| Cash | * No fees involved * No wait times * Anonymity * Inclusive and accessible for underbanked individuals | * Security risks * No proof of payment * Complicated and impractical for large sums * Risk of receiving counterfeits | * Avoiding credit card use and overspending * Keeping the transaction anonymous |
FAQ
What is a bank draft?
A bank draft is a physical form of payment you provide to a 3rd party that's guaranteed by the issuing bank or financial institution. These are sometimes also referred to as banker's drafts, bank cheques, or teller's cheques.
Is a bank draft safe?
Yes, a bank draft is one of the most secure forms of payment you can make. It's safe for the payer because the funds come directly from your bank account, and for the recipient because the funds are guaranteed.
How long does it take a bank draft to clear?
A bank draft may take 1 - 4 business days for the money to be deposited into the payee’s account. Once deposited, a bank draft can't be reversed or cancelled. An international bank draft may take up to 30 business days to clear.
Can a bank draft be cashed by anyone?
No, the only person who can cash a bank draft is the person who's named on the document as the intended recipient. Because of this, the bank will ask the individual cashing the bank draft to provide ID.
What's the difference between a bank draft and a cheque?
The biggest difference between them is that a bank draft requires the funds to immediately be placed in a holding account, while a cheque does not. The funds only come out of your account once the cheque is cashed.
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