What’s the difference between a check and a draft?
A half-remembered definition from a Business Law textbook says something along the lines of:
A draft is a financial instrument an individual draws from a bank account.
A check is a financial instrument a bank draws from itself.
I’m afraid the distinction is a bit too subtle for me.
Well then this ought to be much clearer:
UCC section 3-104
In English, this says:
There are two kinds of instruments, notes and drafts. A note is a promise to pay (an IOU), and a draft is an order to pay (bank: pay this guy). A draft is a check:
a. if it is an order to a bank to pay on demand; or
b. if it is a cashier’s check or a teller’s check (which are checks written by banks)
But a draft is not a check if it has to be submitted with specified documents in order to be honored.
Is this somehow related to “checkers” being called “draughts” in the UK?
When I was younger, my cousin would always tell me that her “checks” were “drafts” because they were from a credit union, and that credit unions couldn’t use “checks” but could only use “drafts” – and they were functionally identical. What gives?
Your cousin was pulling your leg.
I was wondering that too. Though I cannot think what the relationship might be, is it possible that the etymology of the word “exchequer” (meaning a goverment official in charge of the cash) gives some connection.
Oddly enough, I now bank with a CU and they call the checks ‘drafts’ on the statements. More informally, they use the word check like everyone else: for instance, the online link to reorder says ‘reorder checks’, not ‘drafts’. From an old encyclopedia article I got the notion that while checks are typically drawn by the purchaser, drafts typically are issued by sellers, in the context of transactions among businesses. The purchaser of the business’ goods or services takes the place of the bank.
Suppose Business A sells $1000 worth of supplies to Business B, while at the same time owing $1000 or more to Business C. Business A would draw up a draft directing Business B to pay $1000 to the order of Business C. This was a 1960 encyclopedia, though; it’s hard to imagine business is still conducted in this way.
In a previous existence I worked for a company that wrote software for credit unions. It is true that in most credit unions checks are referred to as drafts, and a checking account is a draft account. I never was sure of the rationale behind the different terminology.
Here at the mortgage company we use drafts for many loan fundings. The draft says, “payable through x bank,” instead of “pay to the order of.” The payee can’t present the draft and insist upon cash. Instead the bank checks with us to make sure it should pay. This gives us a little more security in case something comes up. Moreover, the drafts are drawn against our warehouse line, and so not drawn on funds that are immediately available. OTOH some states require us to use “wet funds,” which means we have to have the funds immediately available at closing. In those states, we fund by check.
It’s not wrong to call a check a draft, after all, checks are a kind of draft. This is probably a customary thing, rather than a legal thing, but if an item qualifies as a check, under the UCC, check rules apply to it.
Originally (I mean from the financial reforms in the 30s if not earlier) until some more recent time (60s or later), only banks could have demand deposits. Savings and Loans (and I think credit unions) could have savings accounts. The characteristic of a demand deposit was it had to give you your money on demand while savings accounts could (but rarely did) require you to wait up to 90 days to take your money out. Checking accounts had to be demand deposit accounts so only banks could have checking accounts.
Then some clever S&Ls and credit unions began to offer savings accounts with negotiable orders of withdrawal in accounts called NOW accounts. Now negotiable orders of withdrawal looked exactly like checks and everyone treated them like checks and the distinction is only there in the law any more (and may not even be in the law).
Here is a discussion of what he’s talking about.