What do you do when you need to transfer money to somebody else’s account.
You can either issue a cheque in the name of the party or you can get a pay order or a demand draft made in the name of the party from a bank.
What are the pay order and demand draft, and how are they similar and different?
Many people think they are the same but the fact is that they are totally different instruments issued by banks. Let us take a closer look.
There are times in student life when one need to pay money to appear in an exam and the institution or college requires a small amount of money through either a pay order or a demand draft.
Why do colleges require these two instruments and not the cheque issued by your dad‘?
The reason is simple. If you give a cheque, the college is not sure of the payment and may not have time to wait for the cheque to get clear as they are processing thousands of applications.
One advantage of these two instruments is that they are both prepaid in the sense that you either pay the amount up front by depositing it in the bank, or the amount is deducted from your bank account before the bank issues a payment order or a demand draft in favor of the third party for the desired amount.
Why parties insist on a payment order or a demand draft is that they get immediate cash when they present them in a bank.
Another point of difference with the cheque is that these two do not require any signature appended at the bottom so there is no fear of them being dishonored.
If the party you wish to send money is outstation, you need to get a demand draft made in his favor.
On the other hand,
Pay orders are applicable for payment within the city and you cannot get a pay order made if the party is in any other city. Pay order is also called a banker’s check and is usually cleared in the same branch that issued it.
But this is a headache of the bank and not the party that receives it as he can deposit it in any branch of the bank in the city and also gets the money without any delay.
There is a maximum limit on pay orders and if you wish to have a pay order of higher denomination made, you need to get it made through your own account.
- Both pay orders and demand drafts are safe and secure methods of making payments to third parties.
- Pay orders are payable locally only. You cannot make payment through a pay order if the party is in any other city.
- To make payments to the third party outside the city, you need to get a demand draft made in favor of the party by paying the amount to the bank or getting it made with your account.
Demand draft is a prepaid negotiable instrument, wherein the drawee bank undertakes to make payment in full when the instrument is presented by the payee for payment.
The demand draft is made payable at a specified branch of a bank at a specified center.
In order to obtain payment, the beneficiary has to either present the instrument directly to the branch concerned or have it collected by his bank through the clearing mechanism.
Bankers check is another payment instrument which is used by the banks to settle payment obligations on behalf of their customers.
This instrument is guaranteed by the bank for its full value and is similar to a demand draft.
These instruments are payable at the branch of the issue and are used for payment within the local clearing jurisdiction.