Difference Between Pay Order and Demand Draft?

If you are new to the banking world you might struggle understanding a few terms. While you may have the option of doing an NEFT and RTGS, in certain instances you might end-up doing a pay order or a demand draft. It is hence imperative to understand the difference between the two.

Individuals who are new to the manual or physical banking must be wondering the difference between pay order and demand draft as both serve the same purpose. And another confusion would be which one to use and when?

Here is a simple difference between pay order and demand draft and which one to use and when.

Demand Draft (DD)

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. DD cannot be dishonored as the amount is paid before hand.

Demand draft is usually used to make payment outside a city. Demand Draft can be cleared at any branch of the same bank. A demand draft of value Rs 20,000 or more can be issued only with A/c payee crossing.

Pay Order or Banker's Cheque

The payment order is a financial instrument issued by the bank on behalf of customer stating an order to pay a specified amount to a specified person within the same city.

In payment order is pre-printed with the word "Not Negotiable" . There is no chance of dishonoring as the amount is prepaid. Once issued Pay order will be valid for 3 months.

Instruments	Pay Order	Demand Draft
Purpose	Pay order is an instrument used to make payment within the same city	DD is used to transfer money by an individual from one city to another person in a different city.
Feature	Pay order are pre-printed with "NOT NEGOTIABLE".	Demand Draft is a negotiable instrument
Clearance	Pay order to be cleared in any branch of the same city.	DD can be cleared at any branch of the same bank.

Conclusion

Both the financial instruments are a secure mode of payment to third party. Many schools and colleges prefer these instruments than cheques as there is no possibility of bouncing of the same.

These days many are preffering direct credit through the RTGS and the NEFT mechanism. This completely eliminates the need to visit the bank branch. It is important to note that you have to visit the bank branch to make a demand draft or a pay order. This is unless you have door banking facility where the demand draft will be delivered to your door step.

In any case, you can choose either of the two, depending on where you reside. If you need to make payment to a different state, you choose demand draft, if payment is within the city opt for a payorder.

These days there are not many individuals who use these mechanisms. They are more costlier than the online route. For example, NEFT transfer could cost you as low as Rs 2.50, while a demand draft would most certainly cost you as high as Rs 25. There are certain cases where banks do not charge for demand draft, but that is pretty restricted. It is therefore advisable to use the Real Time Gross Settlement and the National Electronic Fund Transfer in place of demand drafts. However, many institutions may still insist on a demand draft, which is when you might have to deliver one these. This in particular is used for payment at colleges and in some schools.

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