Overdraft vs. Demand Draft — What's the Difference?
By Tayyaba Rehman — Published on December 16, 2023
Overdraft is a facility allowing account holders to withdraw more than their account balance; Demand Draft is a pre-paid instrument instructing a bank to pay a specific sum to a named beneficiary.
Difference Between Overdraft and Demand Draft
Table of Contents
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Key Differences
Overdraft is essentially a credit service provided by banks, allowing account holders to withdraw money exceeding their available account balance. On the contrary, a Demand Draft is a monetary instrument where the payer pre-pays the amount, instructing the bank to pay a specific sum to a designated beneficiary.
Account holders use Overdrafts primarily for short-term financial needs or emergencies, ensuring that checks don't bounce or payments aren't declined due to insufficient funds. In contrast, Demand Drafts are used to transfer money from one person or entity to another without using cash, especially when large sums are involved or immediate clearing is necessary.
For Overdraft facilities, banks generally charge interest on the overdrawn amount, sometimes along with additional fees. Conversely, when creating a Demand Draft, the payer usually incurs a nominal fee, but no interest is charged since the amount is prepaid.
Overdraft limits, depending on the agreement with the bank, can be continuous or fixed-term. They might be reviewed periodically based on the customer's creditworthiness. A Demand Draft, meanwhile, has a specified validity period (often six months), after which it becomes stale if not cashed.
Overdraft facilities, being linked directly to one's bank account, carry the risks associated with any banking operation, such as fraud or unauthorized access. Demand Drafts, on the other hand, are more secure forms of payment, as they are specific to the payee and amount.
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Comparison Chart
Nature
Credit service by banks.
Pre-paid monetary instrument.
Purpose
Short-term financial needs/emergencies.
Transfer money without cash.
Costs
Interest on overdrawn amount + possible fees.
Nominal fee; no interest.
Duration/Validity
Continuous or fixed-term (based on agreement).
Typically six months; becomes stale if not cashed.
Safety and Security
Risks of any banking operation.
More secure; specific to payee and amount.
Compare with Definitions
Overdraft
Excess amount withdrawn from a bank account.
There was an overdraft of $200 in his statement.
Demand Draft
A bank-issued pre-paid payment instrument.
She used a demand draft to pay her university fees.
Overdraft
Interest-bearing borrowed amount from banks.
The interest on the overdraft was higher than she anticipated.
Demand Draft
A safer alternative to personal checks.
Businesses prefer demand drafts due to their security.
Overdraft
A facility allowing withdrawals beyond account balance.
She relied on her overdraft to pay unexpected bills.
Demand Draft
A method to transfer money without cash.
For security reasons, he chose a demand draft over cash.
Overdraft
A form of short-term credit from banks.
The company used an overdraft to cover operational costs.
Demand Draft
A check-like instrument directing a bank to pay a specific sum.
The demand draft had a clear instruction for the bank to follow.
Overdraft
A protection against declined payments due to insufficient funds.
With overdraft protection, her check didn't bounce.
Demand Draft
A non-cash payment with a specified validity.
The demand draft becomes invalid after six months.
Overdraft
The act of overdrawing a bank account.
Overdraft
Abbr. OD or o/d The amount overdrawn.
Overdraft
The maximum amount of credit extended to a customer.
Overdraft
A current of air made to pass over the ignited fuel in a furnace.
Overdraft
A series of flues in a brick kiln designed to force air down from the top.
Overdraft
The air so forced.
Overdraft
(uncountable) The act of overdrawing a bank account.
Overdraft
(countable) The amount overdrawn.
I have an overdraft of £1234.
Overdraft
(countable) The maximum amount that may be overdrawn.
The bank have given me an overdraft of $2000.
Overdraft
The extraction of groundwater from an aquifer beyond the safe yield or equilibrium yield.
Overdraft
A series of flues in a furnace; the current of air forced through them.
Overdraft
(transitive) To extract groundwater from (an aquifer) beyond the safe yield or equilibrium yield.
Overdraft
The act of overdrawing; a draft in excess of the credit balance; also, the amount or sum overdrawn.
Overdraft
A draft in excess of the credit balance
Common Curiosities
Can a demand draft be canceled?
Yes, by the issuer, but usually before it's presented for payment.
Is overdraft a type of loan?
Yes, it's a form of short-term credit provided by the bank.
How quickly does a demand draft clear?
Almost immediately, since it's a prepaid instrument.
Is a demand draft secure?
Yes, it's specific to the payee and amount, making it a secure payment method.
Is a demand draft similar to a personal check?
While both are payment instruments, a demand draft is prepaid, making it more secure.
Are there fees associated with overdrafts?
Yes, banks usually charge interest and may impose additional fees.
Can I have multiple overdrafts?
It depends on the bank's policy, but it's possible with multiple accounts.
Can anyone avail of an overdraft?
Typically, banks offer overdrafts based on creditworthiness or account history.
Can I increase my overdraft limit?
Banks might review and adjust limits based on account performance and creditworthiness.
How long can I use the overdraft facility?
It depends on the agreement with the bank; it can be continuous or fixed-term.
What if a demand draft gets lost?
It's crucial to report it immediately; the issuer can then obtain a duplicate or get it canceled.
Who can cash a demand draft?
The named beneficiary or payee on the draft.
What if I don't repay my overdraft?
Banks might charge penalties, reduce limits, or take legal action.
Are overdrafts available for all account types?
Typically, they're available for checking accounts, but terms vary among banks.
What details are required for a demand draft?
Details like payee's name, amount, issuing branch, and date are needed.
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Written by
Tayyaba RehmanTayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.
