The backbone of the modern economy is the banking system. It is one such financial institution on which almost all individual and business entity depends on. The banking institution around the world offers various monetary arrangements for ease of financial transactions.
Overdraft and Demand draft are two features that most banks around the world offer. Many economic activities become possible with these two monetary services. They have become an essential part of the banking industry.
Overdraft vs Demand Draft
The main difference between Overdraft and Demand Draft is that Overdraft is a credit facility provided by the bank to the customers, in which they can withdraw or deposit amount without a per day limitation and restriction. 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.
Comparison Table Between Overdraft and Demand Draft (in Tabular Form)
| Parameter of Comparison | Overdraft | Demand Draft |
|---|---|---|
| Overview | Overdraft is a service, where the client can withdraw more money than the available balance. | Demand draft is a money transferring process, where the bank issue denomination behalf of the client. |
| Eligibility | Eligibility for the overdraft feature depends on the relationship between the bank and the client. | Everyone is eligible for the demand draft. |
| Credit score | The client must have a good credit score. | Anyone with any credit score can apply for the issuance of a demand draft. |
| Fees | Fixed annual or quarterly fees for overdraft service. | The charge applies to the demand draft depends on the amount. |
| Types | standard overdraft and secured overdraft | Sight demand draft and Time demand draft. |
What is Overdraft?
Overdraft is a facility bank gives to their loyal clients to withdraw more money then what the account holders have in their bank account. Through this financial instrument, the bank can increase the monetary limit of a customer. The overdraft limit is set by the bank, and it may vary upon the relationship between the client and the bank.
The repayment history of previous debt or credit score plays a crucial role in the overdraft limit. A client with a strong credit score gets more overdraft limit than someone who has a low credit score. An overdraft is a short term credit limit, where the client has to return the money within repayment tenure.
Banks provide overdraft as a service, and it may charge additional annual fees for this service. However, the overdraft feature is optional and the client can stop this feature at any time. The client also has to pay additional interest and fees for late repayment.
An overdraft can be taken against savings account, salary account, and time deposits. There are two types of overdrafts is available in most banks. These are standard and secured overdraft.
What is Demand Draft?
Demand Draft is a monitory arrangement in which the bank guarantees payment of a certain amount to the payees. In any situation, the name of the payee cannot be changed and the payment cannot clear through anyone else’s account.
This monitory arrangement is payable on demand. The payee has to deposit the demand draft to the bank for clearance. The client or the payee has to pay the bank in advance for issuance of the demand draft. For this reason, it is not possible to dishonor a demand draft. Due to this reason, most financial institute prefers payment through demand draft.
For the payee of demand draft, a bank account is not mandatory. The payee can get issued a demand draft by depositing cash or cheque to the bank. There are two types of demand drafts “Sight demand draft” and “Time demand draft”.
Most demand drafts with a small amount of money can be encashed without a bank account. However, if the amount exceeds a certain limit then the receiver or drawer has to encash it through a bank account. There is also a bank charge applicable to the demand draft.
Main Differences Between Overdraft and Demand Draft
- Overdraft is a service given to specific few clients of the bank, with this service the client of the bank can withdraw more amount than the available balance. Where the demand draft is a monetary arrangement of the bank by which anyone can securely transfer money to a specific person or entity.
- Someone with a good credit score is eligible for the overdraft. However, anyone can request the bank for demand draft issuance.
- Types of overdrafts are “standard overdraft” and “secured overdraft”. Where the types of demand drafts are “sight demand draft” and “time demand draft”.
- The client must repay the amount of overdraft within a fixed tenure; otherwise, it will attract additional fees and interest. On the other hand, the client has to make the payment for the demand draft in advance by cash or cheque.
- There are fixed annual or quarterly fees for overdraft service. However, the demand draft is an on-demand service, where the charges depend on the demand draft amount.
- The banks put a limit of overdraft amount; the client cannot withdraw more than this limited amount. But there is no limit of demand draft; anyone can request the bank for any limit of demand draft issuance.
Conclusion
On the surface, the overdraft and demand draft may sound the same. But these are two completely different types of banking services. The overdraft is a small type of loan program given to only trusted clients. With the help of this service, the client can withdraw more money than the account balance.
Where demand draft is another type of service, where the bank becomes a trusted medium of money transfer. With this service, the payee deposit the money to the bank and the bank ensures that only the specified drawer able to withdraw the money from the bank.
These two services are built on trust, for the overdraft the bank believes that the client will repay the money on fixed tenure. For the demand draft, the payee believes that the bank will hand over the money to the specified drawer. For this reason, most financial have put their trust in the demand draft.
References
- https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.718.4463&rep=rep1&type=pdf
- https://link.springer.com/article/10.1007/BF01764563