Cheque and Demand drafts (DD) are both negotiable instruments. Both are mechanisms used to make payments.
A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
Demand Draft is a pre-paid Negotiable Instrument, wherein the drawee bank acts as guarantor to make payment in full when the instrument is presented.
In a business transaction cheque is not usually accepted as the drawer and payee are unknown and there will be credit risk. So, in such cases Demand draft is accepted where the transfer of money is guaranteed.
Let us understand this with an example. Let us say that you want to make payment for the purchase of a flat. On the day of registration, if you hand over a cheque and the property is registered and the cheque bounces for some reason, you cannot reverse a property that is registered.
In a demand draft there is guaranteed payment by the banker and there is no question of it bouncing. The biggest difference between a cheque and a DD is that the payment is always honoured.
Here are few other differences between cheque and DD:
1.) Cheque is issued by customer, whereas Demand draft is issued by the bank.
2.) In cheque payment is made after presenting cheque to bank, while in DD is given after making payment to bank.
3.) Cheque can bounce due to insufficient balance . DD cannot be dishonored as amount is paid before hand.
4.) Payment of cheque can be stopped by drawee, whereas payment cannot be stopped in DD.
5.) A cheque can be paid to bearer or order. While, DD is paid to person on order.
6.) In cheque drawer and payee are different person. In DD, both parties are banks.
7.) A cheque needs signature to transfer amount, While DD does not require signature to transfer funds
However, banks do charge certain amount depending on the amount on Demand draft. Outstation cheque are also charged.
Cheques and demand draft are increasingly losing their place as instruments that are used for payments. This is because, most individuals are today making payments through the RTGS and NEFT mechanism. These methods are faster than the traditional methods and there is also no worry of dishonour of a cheque.
Having said that there is a minimum charge that is applicable on NEFT and RTGS transactions. The charges though are very nominal and compared to the convenience, these are much better way of remittance as compared to demand drafts and cheques.
The next time you are entering into a big deal, make sure that you ask for a demand draft. The payment is guaranteed and you do have to worry. There are small charges in the case of a DD, which you can ignore.