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:The cheque is issued by the customer, whereas Demand draft is issued by the bank.
- In cheque payment is made after presenting the cheque to the bank, while in DD is given after making payment to the bank.
- A cheque can bounce due to insufficient balance. DD cannot be dishonored as the amount is paid beforehand.
- Payment of cheque can be stopped by the drawee, whereas payment cannot be stopped in DD.
- A cheque can be paid to bearer or order. While DD is paid to a person on order.
- In cheque drawer and payee are different persons. In DD, both parties are banks.
- 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.
Types of Demand drafts Vs Types of Cheques
Sight Demand Draft - This Demand Draft is payable only after producing certain documents if the receiver fails to provide the specified documents he will not be able to draw the money.
Time Demand Draft - Time Demand Draft is payable only after the specified time. Before time this Demand Draft cannot be withdrawn from the bank.
Types of Cheque
Bearer Cheque - The Bearer Cheque is a kind of Cheque which can be drawn by any individual who carries the Cheque to the Bank.
Order Cheque - Order Cheque can be only drawn by the person whose name is specified in the Cheque. For drawing money from Order Cheque, the beneficiary should carry some government Identity to the bank.
Crossed Cheque - The Crossed Cheque can only be redeemed by following few set of instructions like it cannot be redeemed at the cash counter. It can be deposited directly into a bank account.
Uncrossed Cheque - Uncrossed Cheque is also called as open Cheque. This kind of Cheque can be redeemed at the cash counter.
Stale Cheque - Stale Cheque is a kind of Cheque which can be redeemed only after the date specified on it. This Cheque can be drawn in cash or directly deposited into only after the date specified on the Cheque.
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.