Difference Between Overdraft and Demand Draft

Edited by Diffzy | Updated on: April 30, 2023

       

Difference Between Overdraft and Demand Draft

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Overdraft vs. Demand Draft - Quick Difference

The main difference between an Overdraft and a Demand Draft is that an Overdraft is a line of credit that a bank gives to its customers, allowing them to withdraw or deposit money without daily limits or restrictions. On the other hand, a Demand Draft is a method of money transfer in which the bank sends a draught on behalf of the customer to a third party.

Introduction

The foundation of the digital economy is the financial system. It is one such financial institution upon which practically all individuals and business entities rely on. The financial infrastructure all over the world offers various financial arrangements for the ease of monetary transactions.

Overdraft and demand draft are two features that most banks worldwide offer. Many financial activities become possible with these two financial services. They have become an essential part of the banking industry.

An overdraft is a service where the customer can withdraw more cash than the available balance. A demand draft is a money transfer process where the bank issues a draft on behalf of the customer.

Overdraft vs. Demand Draft

The main difference between an Overdraft and a Demand Draft is that an Overdraft is a credit facility provided by the bank to the customers, in which they can withdraw or deposit funds without daily limits and restrictions. On the other hand, Demand Draft is a process to transfer money in which the bank issues a draft on the request of a customer for a third party.

Difference Between Overdraft and Demand Draft in Tabular Form

Parameter of Comparison Overdraft Demand Draft
Overview Overdraft is a help, where the client can pull out more cash than the accessible equilibrium. Demand draft is a money transfer process where the bank issues a draft on behalf of the customer.
Eligibility Qualification for the overdraft include relies upon the connection between the bank and the client. Not everyone is eligible to obtain a demand draft, as it requires the customer to have a bank account and sufficient funds to cover the amount.
Credit score The client should have a decent FICO rating. Anybody with any financial assessment can apply for the issuance of a demand draft.
Fees Fixed yearly or quarterly expenses for overdraft administration.

The fee charged for a demand draft varies based on the amount of the draft.

Types Secure and Unsecured There are two types of demand drafts: sight demand draft and time demand draft.

What is Overdraft?

Overdraft is an official bank that provides for their dedicated clients to pull out more cash than what the record holders have in their financial balance. Through this monetary instrument, the bank can expand the financial furthest reaches of a client. As far as possible is set by the bank, and it might change upon the connection between the client and the bank.

The reimbursement history of past obligation or FICO rating assumes a pivotal part as far as possible. A client with a solid financial assessment gets more overdraft limit than somebody who has a low FICO rating. An overdraft is a momentary credit limit, where the client needs to return the cash inside reimbursement residency.

Banks give overdrafts as a help, and they might charge extra yearly expenses for this assistance. Nonetheless, the overdraft highlight is discretionary and the client can stop this component whenever. The client likewise needs to pay extra interest and charges for late reimbursement.

An overdraft can be considered, compensation records, and time stores. There are two kinds of overdrafts that are accessible in many banks. These are standard and gotten overdraft. An overdraft allows you to get cash through your present record by taking out more cash than you have in the record - at the end of the day you go "overdrawn". There's typically a charge for this. You can ask your bank for an overdraft - or they may very well give you the one - yet remember that an overdraft is a kind of advance.

An overdraft is a credit given by a bank that permits a client to take care of bills and different costs when the record arrives at nothing. For an expense, the bank gives a credit to the client in case of a surprising charge or inadequate record balance.

An organized overdraft is probably not going to significantly affect your FICO assessment as long as you don't go past your overdraft limit or have instalments denied. Assuming you utilize your overdraft reasonably and consistently take care of it could further develop your FICO score.

  • An overdraft permits you to get to additional assets through your exchange account up to an endorsed overdraft limit, staying away from overdrawn and shame expenses.
  • Interest is just charged on the sum overdrawn (when expenses and charges are paid on schedule). A month-to-month advance record expense may likewise be charged, contingent upon the sort of overdraft you pick.
  • You can make withdrawals involving your overdraft in every one of the typical ways, including at an ATM, in-branch, Debit Mastercard, BPAY®, Online, Mobile, Telephone, and EFTPOS.
  • Overdrafts don't have a set reimbursement plan, permitting you to conclude when you need to make a reimbursement, for instance, when your compensation is credited to your record.
  • You ought to likewise cautiously consider as far as possible you apply to abstain from overspending.
  • Credit measures, agreements, expenses, and charges apply.

What is a Demand Draft?

A Demand Draft is a monetary course of action wherein the bank ensures the payment of a specific amount to the payee. Once issued, the name of the payee cannot be changed, and the payment cannot be cleared through any other person's account. A Demand Draft is a method utilized by an individual to make a transfer payment from one bank account to another. Unlike standard checks, Demand Drafts do not require signatures to be cleared.

A Demand Draft is a method for initiating a bank transfer that doesn't require a signature, similar to a check. It is a prepaid instrument, and therefore, you cannot stop payment on it due to fraud or intended beneficiaries.

To issue a Demand Draft, you need to provide details such as your bank account information, the full name of the payee, and the payee's bank address. You also need to provide the amount of money, the currency, the reason for the payment, and instructions about whether the bank should send it to you or directly to the payee.

It is an unconditional order for payment and bears no signature. The draft can be negotiated by endorsement and delivery. The purchaser of the DD need not be a customer of the bank. A Demand Draft is drawn by a banker on its branch or upon another bank.

This monetary arrangement is payable on demand. The payee needs to deposit the Demand Draft in the bank for clearance. The customer or the payee needs to pay the bank in advance for the issuance of the Demand Draft. Thus, it is impossible to dishonor a Demand Draft. For this reason, most financial institutions prefer payment through Demand Draft.

For the payee of a Demand Draft, a bank account is not mandatory. The payee can get the Demand Draft by depositing money or a check to the bank. There are two types of Demand Drafts: "Sight Demand Draft" and "Time Demand Draft". Benefits of the Demand Draft are as follows: Unlike in the case of a check, the transfer of the expected amount under the DD is guaranteed. DD banking is convenient as it does not have the maximum amount limit and does not require the payee's financial information.

Most Demand Drafts with a small amount of money can be encashed without a bank account. However, if the amount exceeds a certain limit, the recipient or drawer needs to encash it through a bank account. There is also a bank charge applicable to the Demand Draft.

A Demand Draft or DD is a negotiable instrument issued by the bank. The significance of a negotiable instrument is that it guarantees a specific amount of payment referencing the name of the payee. It cannot be transferred to another person. The bank issues the draft to a customer (drawer) instructing another bank or its own branch to pay the specified amount to the payee.

Demand Drafts can be compared to checks, but they are more difficult to fake and more secure. This is because the drawer needs to pay before issuing a Demand Draft to the bank, while a check can be issued without ensuring adequate funds in your bank account. Therefore, checks can bounce, but drafts guarantee a secure and timely payment.

The drafts are payable on demand. They cannot be paid to the bearer, but the recipient needs to present the instrument directly to the branch. They can also be collected by the receiving party free from the bank.

Generally, Demand Drafts are issued in situations where the parties are unknown to each other and require trust. They come in handy in such situations as there are no chances of fraud and forgery.

A Demand Draft (also known as a DD) is a prepaid negotiable instrument, wherein the Bank by whom the Demand Draft has been made undertakes the obligation to make full payment whenever the Instrument is presented for payment. To receive the payment, the recipient either needs to deposit the same in his Bank Account or get the same collected through the Branch that has made the DD.

While making a Demand Draft, the Bank deducts the amount from the Bank Account of the individual who has requested for setting aside the Demand Draft and credits the same in their account. Also, when the DD is presented for clearing, the banker must make the payment.

It is not mandatory that you should have a Bank Account in the Bank from where you are preparing the Demand Draft. The Demand Draft can be made by paying the Bank in Cash as well, but for Demand Drafts exceeding Rs. 50,000 the payment should be through a cheque only. Quoting your PAN No. is also mandatory if the value of the DD is more than Rs. 50,000.

Main Differences Between Overdraft and Demand Draft in Points

  • Overdraft is a facility provided by the bank to specific customers, which allows them to withdraw more money than the available balance. On the other hand, a Demand Draft is a banking instrument that allows anyone to securely transfer money to a specific individual or entity.

  • An individual with a good credit score is eligible for an overdraft facility. However, anyone can request the bank to issue a Demand Draft.

  • The two types of overdrafts are "unsecured overdraft" and "secured overdraft", while the two types of Demand Drafts are "Sight Demand Draft" and "Time Demand Draft".

  • The client must repay the overdraft within a specified time period; otherwise, it will attract additional charges and interest. On the other hand, payment for a Demand Draft must be made in advance with cash or check.

  • Overdraft facilities may have fixed annual or quarterly charges. In contrast, Demand Drafts are an on-demand service, and the charges depend on the amount of the Demand Draft.

  • Banks impose a limit on the overdraft amount that a customer can withdraw. However, there is no limit to the amount of a Demand Draft; anyone can request a Demand Draft for any amount.

Conclusion

By all accounts, an overdraft and a demand draft may sound similar, but they are actually two different types of financial services. An overdraft is a small type of loan program provided only to trusted customers. With this service, the customer can withdraw more money than their account balance.

On the other hand, a demand draft is another type of service where the bank becomes a trusted intermediary for money transfer. With this service, the payee deposits the money in the bank, and the bank ensures that only the designated drawer is able to withdraw the money from the bank.

Both of these services are based on trust. For an overdraft, the bank trusts that the customer will repay the money within a fixed time period. For a demand draft, the payee trusts that the bank will release the money to the designated drawer. Thus, most financial institutions have placed their trust in demand drafts.

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"Difference Between Overdraft and Demand Draft." Diffzy.com, 2024. Fri. 23 Feb. 2024. <https://www.diffzy.com/article/difference-between-overdraft-and-demand-draft-56>.



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