Bank Draft vs. Bank Overdraft

Attribute	Bank Draft	Bank Overdraft
Definition	A payment method where the bank guarantees the payment on behalf of the payer	A financial arrangement where a customer can withdraw more money than they have in their account
Usage	Used for making secure payments	Used for short-term borrowing
Approval	Requires approval from the bank before issuing	Pre-approved by the bank
Cost	May involve fees for issuing	May involve interest charges for the overdraft amount

Introduction

Bank draft and bank overdraft are two common banking services that are often confused by customers. While both involve accessing funds from a bank, they have distinct attributes that set them apart. In this article, we will compare the features of bank draft and bank overdraft to help you understand the differences between the two.

Bank Draft

A bank draft is a secure form of payment that guarantees the recipient will receive the specified amount. When you request a bank draft from your bank, they will withdraw the funds from your account and issue a draft in the recipient's name. This draft can then be deposited into the recipient's account or cashed at their bank. Bank drafts are often used for large transactions or when the recipient requires a guaranteed form of payment.

• Secure form of payment
• Guarantees recipient will receive specified amount
• Withdrawn from account before issuance
• Used for large transactions
• Recipient can deposit or cash draft

Bank Overdraft

A bank overdraft, on the other hand, is a form of credit that allows you to withdraw more money than you have in your account. When you make a transaction that exceeds your account balance, the bank covers the difference and charges you an overdraft fee. Bank overdrafts can be useful for covering unexpected expenses or temporary cash flow shortages, but they can also lead to high fees if not managed properly.

• Allows withdrawal of more money than in account
• Bank covers difference and charges overdraft fee
• Useful for unexpected expenses or cash flow shortages
• Can lead to high fees if not managed properly

Comparison

When comparing bank draft and bank overdraft, it is important to consider their key attributes. Bank drafts are a secure form of payment that guarantees the recipient will receive the specified amount, making them ideal for large transactions. In contrast, bank overdrafts provide a temporary line of credit that allows you to withdraw more money than you have in your account, but they come with fees and interest charges.

• Bank drafts are secure, while bank overdrafts involve credit
• Bank drafts guarantee payment amount, while bank overdrafts cover shortfalls
• Bank drafts are used for large transactions, while bank overdrafts are for unexpected expenses
• Bank drafts have no fees, while bank overdrafts have fees and interest charges

Conclusion

In conclusion, bank draft and bank overdraft are two distinct banking services that serve different purposes. Bank drafts provide a secure form of payment for large transactions, while bank overdrafts offer a temporary line of credit for covering shortfalls in your account. Understanding the differences between these two services can help you make informed decisions about how to manage your finances effectively.