Certified Cheque vs. Bank Draft vs. Money Order: Choosing the Right Payment Method

In Canada, there are various methods for making secure and reliable payments, each with its own advantages and use cases.
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Three common payment instruments that Canadians frequently encounter are certified cheques, bank drafts, and money orders. In this comprehensive guide, we’ll explore the differences and similarities between these payment methods, helping you choose the right one for your specific needs.

Certified Cheque

A certified cheque is a personal cheque that has been verified and guaranteed by the issuing bank. When you request a certified cheque, the bank ensures that you have sufficient funds in your account to cover the cheque’s amount and then sets aside those funds. The bank then certifies the cheque by endorsing it or affixing a certification stamp, indicating that the funds are secured and will be available when the cheque is presented for payment.

Key Characteristics of Certified Cheques:

a. Security: Certified cheques offer a high level of security because the funds are set aside, reducing the risk of the cheque bouncing.

b. Credibility: The certification process adds credibility to the cheque, making it a reliable payment method in transactions requiring trust and assurance.

c. Limited Use: Certified cheques are typically used for significant transactions, such as real estate deals, where a high degree of security is needed.

d. Cost: Banks may charge a fee for certifying a cheque, and the fee can vary depending on the bank and the cheque’s amount.

Bank Draft

A bank draft, also known as a cashier’s cheque, is a payment instrument issued by a bank on behalf of the payer. It is considered as good as cash because the bank guarantees the funds. When you request a bank draft, you provide the bank with the payment amount, and they withdraw the funds from your account and issue the draft to the payee.

Key Characteristics of Bank Drafts:

a. High Security: Bank drafts are highly secure because the bank itself guarantees the funds. They are often used in significant transactions.

b. Credibility: Bank drafts are considered very credible and reliable payment instruments, making them a preferred choice for real estate transactions, large purchases, and legal obligations.

c. No Bouncing: Since the funds are already withdrawn from your account, there is no risk of the draft bouncing.

d. Cost: Banks typically charge a fee for issuing a bank draft, which may vary based on the amount.

Money Order

A money order is a prepaid payment instrument issued by various organizations, including post offices, banks, and financial institutions. To obtain a money order, you pay the issuing organization the desired amount plus a fee. The organization then issues the money order, which can be made payable to a specific recipient. The recipient can cash or deposit the money order just like a cheque.

Key Characteristics of Money Orders:

a. Prepaid: Money orders are prepaid, meaning you pay the amount upfront, and the issuing organization guarantees the payment.

b. Accessibility: Money orders are widely available at post offices, banks, and convenience stores, making them accessible for various payment scenarios.

c. Versatility: Money orders can be used for a wide range of transactions, from paying bills and rent to sending money to individuals or organizations.

d. Cost: The cost of a money order typically includes the face value of the money order plus a fee, which varies depending on the issuing organization.

Comparison of Certified Cheque, Bank Draft, and Money Order

Now that we have a clear understanding of each payment method, let’s compare certified cheques, bank drafts, and money orders based on several important factors:

Security:

    • Certified Cheque: Offers a high level of security because the funds are verified and set aside.
    • Bank Draft: Highly secure as the bank guarantees the funds.
    • Money Order: Secure because it’s prepaid, and the issuing organization guarantees the payment.
  1. Credibility:

    • Certified Cheque: Considered credible and reliable for transactions requiring trust.
    • Bank Draft: Highly credible and often used for significant transactions.
    • Money Order: Credible for a wide range of transactions, but may not be preferred for very large payments.
  2. Accessibility:

    • Certified Cheque: Available through banks, but you need an account with the bank.
    • Bank Draft: Requires a bank account, and the issuing bank provides it.
    • Money Order: Widely accessible at post offices, banks, and convenience stores, without requiring a bank account.
  3. Use Cases:

    • Certified Cheque: Typically used for significant transactions like real estate deals.
    • Bank Draft: Commonly used for large purchases, real estate transactions, and legal obligations.
    • Money Order: Versatile and suitable for paying bills, rent, and sending money to individuals or organizations.
  4. Cost:

    • Certified Cheque: Banks may charge a fee for certifying a cheque.
    • Bank Draft: Banks typically charge a fee for issuing a bank draft.
    • Money Order: The cost includes the face value of the money order plus a fee, which varies by the issuing organization.
  5. Risk of Bouncing:

    • Certified Cheque: Minimal risk because the funds are set aside.
    • Bank Draft: No risk of bouncing as the funds are guaranteed by the bank.
    • Money Order: Minimal risk because it’s prepaid and guaranteed by the issuing organization.

When to Use Each Payment Method

The choice between a certified cheque, bank draft, or money order depends on the specific circumstances and requirements of your transaction:

  • Certified Cheque: Use a certified cheque when you have an account with a bank, and the recipient requires a payment method with a high level of security and credibility. This is especially relevant for significant transactions like real estate purchases.
  • Bank Draft: Opt for a bank draft when you need the utmost security and credibility in your payment. Bank drafts are ideal for large purchases, real estate transactions, and legal obligations.
  • Money Order: Choose a money order for its versatility and accessibility. Money orders are suitable for a wide range of transactions, including paying bills, rent, or sending money to individuals or organizations. They are also a convenient option if you don’t have a bank account.

Conclusion

Certified cheques, bank drafts, and money orders are essential payment instruments in Canada, each offering specific advantages and use cases. Understanding the differences and similarities between these payment methods can help you make informed decisions when conducting financial transactions. Whether you require the high security of a certified cheque, the credibility of a bank draft, or the versatility of a money order, there’s a payment method that suits your needs. The key is to assess the specific requirements of your transaction and choose the option that aligns with your priorities for security, accessibility, and cost-effectiveness.

Vik Palan

Vik Palan

Chief Editor - Ratestead.ca

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