Demand Draft vs Cheque: Difference Between Cheque and Demand Draft

In today’s fast-paced world, banks and other financial institutions offer a variety of payment methods, including cash, credit/debit cards, bank transfers, cheques, and demand drafts. Each mode has unique features and pros and cons. 

While digital payments have rapidly grown in popularity, traditional payment methods like cheques and demand drafts are still widely used for large payments. In the following sections, we will cover everything you need to know about these two payment methods. Learn more about the advantages and differences between cheques and demand drafts below. 

What is a Cheque?

A cheque is a negotiable instrument, a document through which a drawer or payer (the person issuing the cheque) promises a certain payment to the bearer of the cheque on or by a certain date. It is a written instrument individuals and businesses use to make payments from their bank accounts. 

Even in the digital age, cheques are a very useful payment mode. They suit both small and large transactions and various transaction types, from paying salaries to utility bills. They are a secure form of payment that is widely acceptable and easy to issue. Furthermore, they carry no transaction limits and provide proof of payment anytime you use them. 

There are a variety of cheques that you can issue, from bearer cheques to account payee cheques, with simple instructions. This gives you the flexibility to restrict fund transfers to a payee's (the beneficiary’s) account, prevent unauthorised transfers, or let anyone easily cash them. To issue a cheque, you only need to write the payee's name, amount, date of issuance, and signature. 

Advantages of Cheques

Here are the benefits of using cheques:

• Creates a Paper Trail: One of the biggest advantages of using cheques is creating a paper trail for both the drawer and the payee. This makes them traceable and difficult to use for carrying out fraud. 
• Serves as Income Proof: The bank statement containing the payment details can serve as valid proof of income for verification and resolving legal disputes. You can also use a cancelled cheque as proof of income.  
• Acceptability and Availability: Cheques are one of the oldest payment methods and are accepted almost everywhere for large transactions. All account holders in India get a chequebook when opening a new bank account. A nominal or no fee is charged for a new chequebook.  
• No Transaction Limits: Cheques are preferred for high-value transactions as they don’t carry any transaction limit for deposits. 
• Convenience for the Payer: Cheques are safer for the payer as the bank can cancel payments if they notice any discrepancies. Payments can also stop if the payer has insufficient balance in their account, resulting in a bounce charge. 
• No Processing Fees: Some businesses prefer cheques over other payment methods as they don't carry processing charges, unlike credit cards. They also don't have a minimum spending requirement. 
• Security Features: All cheques have various security features such as watermarks, MICR codes or special inks, thus making it difficult to reproduce. Furthermore, banks verify the signature and account details before transferring funds.
• Flexibility: You can customise the payment method by writing special payment instructions on the cheque, such as ‘account payee only’, ‘non-negotiable’, or ‘non-transferrable’. 

What is a Demand Draft?

A demand draft is a prepaid instrument issued by banks on behalf of a customer. It transfers funds from one bank account to another without the need for a signature. A demand draft is issued after the drawer deposits the required funds with the bank, allowing the bank to guarantee payment to the payee mentioned in the draft.   

As a demand draft is a prepaid payment method, you cannot stop the transfer of funds once you have decided to make a payment. Demand drafts are convenient and useful for payees as fund transfer is prompt and assured. You can issue a demand draft with a predetermined expiration date for redeeming the payment. 

Advantages of Demand Draft

Here are the advantages of using demand drafts for receiving or sending payments:

• Security and Reliability: Demand drafts are one of the safest modes of payment as they cannot be counterfeited. For payees, they provide a high degree of safety and reliability as they carry a guarantee of payment by the issuing bank. 
• Wide Acceptance: As demand drafts provide payment assurance and are redeemable at any bank, they are widely accepted across institutions and businesses. You can use DDs to pay college fees, pay vendors, purchase property and more. 
• Fixed Terms: Demand drafts have fixed terms, such as a fixed amount and a specific date of payment. Thus, they are much safer for the payers because terms cannot be altered or overwritten as compared to cheques.
• No Chance for Bounce: There is no risk of a failed payment due to insufficient funds, as the entire amount is pre-issued. This means no bounce charges are applicable for the drawer, and the payee gets complete peace of mind.  
• Convenient: Besides security, demand drafts provide prompt payments once you encash them. They are also convenient because they are a flexible payment method with no transaction limits, making them suitable for high-value transactions. 
• Traceable Payments: Like cheques, demand drafts provide a clear paper trail. Once issued, a demand draft document serves as proof of payment. Moreover, the bank records the details of issuance and encashment. 

Key Differences Between Cheque and Demand Draft

While both cheques and demand drafts are commonly used financial instruments, they have notable differences. In the table given below, we have listed the notable differences between demand drafts vs cheques:

Which is Better? - Cheque or Demand Draft

Cheques offer various advantages over demand drafts for the payer (drawer). Firstly, the payer can postpone payment until the cheque is presented for clearance. Secondly, it is easier to issue as you only need to write a few basic details. Finally, cheques offer a variety of payment options, including payment to a specific person, bearer of cheques or a bank.   

In contrast, demand drafts offer the payee (receiver) more advantages. They offer greater safety and convenience with no chance of payment failure, and they cannot be counterfeited, and the funds are already deposited by the drawer with the bank. As such, they are more acceptable across different institutions and corporations. Additionally, they cannot be cancelled after its issuance. 

Cheques may be a better choice in certain situations where you want the convenience of more time to make a large payment. Demand drafts could be a better choice when you need to make a prompt and secure payment, especially with payees you don’t know well. Ultimately, the right choice depends on your needs and choice. 

Cheques and demand drafts are traditional payment instruments available from banks. While both payment methods have decreased in recent years due to the advent of digital banking, many people and companies use these options, especially for high-value transactions. Knowing the differences between cheques and demand drafts can help you decide which is better for you.

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