5 viewed last edited 4 years ago
Ananya Juluri

What is a Demand Draft? How does one use it and for what purpose?

Vivekanand Vellanki

Lets say I have to pay someone 100,000/- for buying a second hand car.

What options do I have?

  1. Pay cash. However, I may not carry that much money in cash. Cash can be stolen and hence is risky to carry
  2. Give a cheque. However, the Seller is not sure if the cheque will be honoured. That is, the person does not know if they will get the money if the cheque is presented in the bank. For e.g., there may not be enough money in my bank account

How do you solve this problem?

Demand drafts solve this problem in the following way:

  1. When I take a demand draft for 100,000/-, the money is debited from my account immediately and is transferred to the bank's account
  2. The bank then gives a demand draft for the same amount
  3. The Seller then presents the demand draft to the bank and the bank gives the amount to the Seller

In case, I decide that I dont want to buy the second hand car, I can present the demand draft at the bank and take my money back.

This is very similar to how an escrow account works.