How Bank Drafts Work

A bank draft is a type of check that guarantees payment by the bank that issues the bank draft. It is typically used in any transaction where the buyer or seller wishes to guarantee the payment of funds. Bank drafts are frequently used in international transactions and they are often used in real estate transactions.

What Makes a Bank Draft Different Than a Check

A bank draft is obtained by a buyer, from their own bank, either by handing over cash or by having the bank deduct the amount of the draft from the buyer's account. It is this fact that makes it difficult to cancel or stop payment on a bank draft since the buyer has already paid out the funds that the draft represents. Typically, a bank draft does not expire but most often it is recommended that a buyer does not purchase one too far in advance.

Key Takeaways

  • A bank draft is also referred to as a bank check or cashier's check.
  • Some financial institutions abroad may not accept a draft that is over six months old. 
  • Bank drafts are often used when buying a home or condo, a new car, or even renting an apartment.
  • A bank draft is effectively similar to a money order, but there are more restrictions involved with money orders.

When to Use a Bank Draft

Bank drafts can be used abroad. For example, if you are buying a house in a foreign country, a bank draft drawn on your account can typically provide funds in a specified currency, instead of having to convert U.S. dollars. When you receive a bank draft, it can be deposited at any bank because it is treated as cash, unlike when you deposit a personal check.

If a bank draft is lost or stolen, reporting it immediately to your financial institution is critical to having the bank put a stop on the draft.

How Do I Cancel a Bank Draft?

There are certain reasons why a bank will most likely agree to cancel a draft and It is difficult to cancel or stop payment on a bank draft outside of these conditions because, in effect, a bank draft represents a transaction that has already occurred.

Since the buyer has already paid the funds to obtain the bank draft, the only means of effectively canceling the draft is to have the seller cash it and return the funds to the buyer.

However, if the draft has been lost, stolen or destroyed, the buyer may be able to cancel the draft by returning to his bank, explaining that the draft is irretrievable by either himself or the seller, and presenting to the bank the reference number or a printed copy of the draft.

As long as the bank can verify that the draft has not been cashed, it can cancel it and issue a new, replacement draft. It is a good idea to verify cancellation and replacement policies with the issuing bank.