Money Order vs. Bank Draft: What’s the Difference
When choosing a mode of money transfer, Canadians should compare money order vs. bank draft. Although these standard payment instruments seem similar, they have differences.
A bank draft is a security instrument for large payments. The bank issues it after deducting money from the payer’s account. A money order is a document issued by a financial institution that the payee uses to demand payment. Money orders make small payments up to $1000.
How a Bank Draft Works
Bank drafts are used mainly by individuals making large payments. They are common among real estate purchases and estate settlements. Bank drafts are safe because the payer can purchase items without withdrawing cash from their account.
You will first submit a request to your financial institution when you want to pay using a bank draft. Then, the bank checks your account to confirm if you have sufficient funds.
The bank then withdraws the money from your account and transfers it to a reserve account. You will get a bank draft of the equivalent amount, which you should present to the payee.
A bank draft bears the name of the person who will receive the money. The bank must confirm the payee’s identity before releasing the money into their account. It could take up to 4 business days for funds to reflect in the seller’s account.
Financial institutions charge a small fee for bank drafts. However, some banks have several free bank drafts for their customers. Unlike e-transfers, it is hard to cancel a transaction on a bank draft because the money is withdrawn from your account beforehand.
Bank drafts make payments in different currencies, and you can deposit them at any bank. Although these bank checks do not have an expiry date, some financial institutions have a time limit on their bank checks.
How Do Money Orders Work?
A money order is a physical payment instrument issued by a financial institution to allow the payee to receive payments. They are used to make small payments of up to $1000. You can purchase a money order using cash, debit, or credit card or withdraw money from the bank.
Money orders are a convenient way to send money because the payee does not require a chequing account to receive payments. However, some money orders have expiration dates while others don’t, so you should ask the vendor.
Bank Draft vs. Money Order Differences
While these two payment methods seem similar because they do not involve cash exchange, they are different in some ways. For example, you can only get a bank draft from a bank or a financial institution.
That differs from money orders because they are purchased using cash across the counter. You can buy a money order from an approved institution like a bank, post office, or a certified store. You can also buy one from Western Union and Money Mart.
Bank drafts are less secure than money orders, as the payment document contains the payee’s details, like their bank account number. On the other hand, money orders do not carry personal information.
Money orders are more readily available than bank drafts. You can buy them from approved institutions, and there is no need for proof that you have enough money in the account.
On the contrary, you can only purchase a bank draft from your bank. Before issuing the bank draft, the bank first confirms if you have enough money and transfers the cash to a reserve account.
Advantages and Disadvantages of Bank Draft and Money Order
When comparing bank draft vs. money order Canada, it is essential to check the pros and cons of each. For example, although money orders are safer, bank drafts are ideal for making huge payments. Some pros and cons of these two payment instruments are;
Pros of Bank Draft
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Money Availability Is Guaranteed
When you purchase a bank draft, the bank first confirms if you have enough money in the account and deducts it before issuing the cheque. Therefore, the payee is guaranteed money availability because it is already in a reserve account.
That differs from personal cheques that can bounce due to insufficient money in the payer’s account. People doing bog transactions prefer bank drafts to personal cheques.
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Available In Many Currencies
You can get bank drafts in various currencies. Therefore, you can purchase property in other countries using this payment instrument. However, note that the currency exchange fees apply.
Exchanging your money at the bank or an ATM can cost you more due to the high exchange rates. You can consider Knightsbridge FX because they offer lower currency exchange rates.
Bank drafts are a convenient and safer way to transfer large sums of money. They do not have a limited amount like e-transfers and cash.
Cons of Bank Drafts
Although you can transfer any amount of money using a bank draft, it has some disadvantages.
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You Cannot Cancel a Bank Draft
Unlike e-transfers, you can’t cancel a bank draft once you deliver it to a payee. That’s because the bank withdraws money from your account after storing it in the reserve account, awaiting the payee to claim it. So, you could suffer losses if your payment terms with the seller change.
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You Can’t Transfer Money Electronically
Technology is changing, and most business owners prefer getting paid using electronic methods like Wise or e-transfer. However, bank drafts involve a physical form that must be presented to a financial institution to get the money into your account.
Pros of Money Order
Money orders are easy to purchase, and you don’t need the bank to confirm that you have sufficient money in your account. Some advantages of using money orders are;
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They Are Easily Available
Unlike bank drafts that require you to buy from the bank, you can purchase a money order from a post office or other verified vendors. The buyer can pay for the money order in cash, a traveler’s cheque, or a debit card.
A money order does not have the payee’s details like a bank account. Therefore, less fraud and scamming are involved if you lose the tiny certificate. They are also traceable and replaceable.
Money orders get issued after payment, so there is a cash guarantee. Most small businesses prefer this payment method because it is unlikely to bounce.
Cons of Money Order
You can only use money orders to make payments up to $1000. If you have more significant bills to pay, you will need more costly money orders. Cashing the money order also costs a fee, making it an expensive payment method.
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Money Orders Scams Are Common
It is hard to tell a cashed-out money order, making the cash transfer method more prone to scams like e-transfers.
Getting the money in your account could take days after cashing out a money order. Delays happen when you cash it in a different bank from the issuer.
Final Words
Choosing money order vs. bank draft can be challenging because of the similarities these payment methods have. However, many differences can help you distinguish the two. For example, money orders have a limit transfer amount of $1000, while you can transfer any amount with bank drafts.