Is a Draft a Check? Key Differences Explained

Checks and drafts are financial instruments that facilitate payments, serving as written orders for a specified sum of money. While both transfer funds, their underlying mechanisms and the parties involved differ significantly. Understanding these distinctions is important for navigating various financial transactions.

What is a Check

A check is a written instruction to a bank to disburse a specific amount of money from a designated account. This payment is directed to the individual or entity named on the check. Three primary parties are involved: the drawer, who writes the check; the payee, who is the recipient; and the drawee, which is the bank holding the drawer’s account.

When a check is presented, the bank relies on the drawer’s account having sufficient funds. If the account lacks the necessary balance, the check can “bounce,” meaning it will not be honored. Checks are governed by Uniform Commercial Code Article 3, which defines a check as a draft drawn on a bank and payable on demand. While checks offer a convenient way to make payments, their acceptance depends entirely on the drawer maintaining adequate funds.

What is a Draft

A draft is a written order from one party (the drawer) instructing another (the drawee) to pay a specific sum of money to a third party (the payee). In banking, drafts often involve a financial institution as the primary payer or guarantor of funds, setting them apart from personal checks. This institutional backing provides a higher level of payment assurance.

Common types of drafts include cashier’s checks, bank drafts, and money orders. A cashier’s check is issued by a bank and drawn on its own funds. When a customer requests one, the bank withdraws funds from the customer’s account and then issues the check, making the bank the guarantor. This makes them secure for large transactions like real estate purchases.

A bank draft, also known as a banker’s draft or teller’s check, is an instrument guaranteed by the issuing bank, often used for secure or international transactions. A money order is a prepaid instrument typically available from financial institutions or post offices. Money orders are purchased by prepaying the amount, usually with cash, ensuring the funds are guaranteed and cannot bounce.

Distinguishing Features

The fundamental difference between a check and a draft lies in who guarantees the payment. For a personal check, payment relies on the drawer’s individual account balance. If funds are insufficient, the check can be dishonored, resulting in a bounced check and associated fees.

In contrast, drafts like cashier’s checks, bank drafts, and money orders are guaranteed by the issuing financial institution. The funds for these instruments are either drawn from the bank’s own account or prepaid by the purchaser, ensuring the payment will clear. This provides a higher assurance of payment because the issuing institution has already secured the money.

Regarding revocability, stopping payment on a personal check is generally possible, though it requires timely action and can incur fees. For drafts, once issued, stopping payment is difficult or impossible due to their guaranteed nature. Checks are issued by an individual or business directly from their checking account, while drafts are issued by a financial institution. Drafts are often preferred for significant transactions where the payee requires guaranteed funds, offering a more secure payment method than a personal check.