What is a bank draft or overdraft and how to do it and what are the types? – Advantages and disadvantages

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What is a bank draft or overdraft and how to do it and what are the types?  – Advantages and disadvantages

A bank overdraft is when we make a purchase or cancel a service without realizing that we do not have the full amount of money, however the operation is carried out correctly. This happens because the bank cancels your expense in the same way.

That is to say, a bank overdraft is a kind of credit that the bank grants to a client at a precise moment, which is later in charge of collecting from your savings or current account the amount of the operation carried out and added to that, a separate fee for overdrawing your account.

On the other hand, a bank draft works as a financial tool which customers request from banks and then use it to make certain payments through it.

A bank check, also known as a money order, is a payment method that is generally used when dealing with a large amount of money. The same must be available in the issuer’s account, so that the owner of the same can collect it without problems when the bank validates the information. Bank drafts and overdrafts are used in the strategies that banks apply to increase their customers.

two women and a man with a giant check

Types of drafts and bank overdrafts

There are several types of bank drafts, among the most common we have postal orders, these are a financial tool that are sent from one place to another and can also be issued by the bank in the name of the clients.

Cashier’s checks, in this type of bank draft, the bank is the payer of the check and then collects that money in the form of cash or obtains it directly from the issuer’s account, the bank must guarantee that this draft will be paid at the time the check is validated.

Certified checks, certified checks must be sealed and signed by an operator of the holder’s bank, which adds validity and confirms that the issuer of said check has in its account the amount of money sufficient to cover the payment of the check issued by either whatever the amount of money embodied in it.

Bank drafts, these bank drafts refer to transactions carried out by certain financial institutions, not necessarily only banks, these can be national or international. These transactions work in a similar way to checks, that is, the issuer of the check guarantees the institution that it has the necessary liquidity at the time the document is presented for its withdrawal.

As for bank overdrafts, there are only two types. The authorized bank overdraft is when you agree in advance with the bank the use of these and set the commissions for them.

And we have the unauthorized bank overdraft, this results when nothing has been agreed with the bank and you still incur an overdraft. We must bear in mind that it is possible to fall into an unauthorized overdraft when we exceed the limit of those that were authorized. These usually charge higher commissions.

Advantages and disadvantages of a bank draft or overdraft

Overdrafts allow you to successfully complete your transactions even if you run out of sufficient funds, avoid the rejection or return of checks, the procedure to obtain one is usually faster than applying for a regular loan.

But also, in addition to the fact that overdrafts have a high value in commissions, they can significantly affect your banking history if you do not comply with their payment.

One of the advantages of making bank drafts is that you reduce the possibility of losing cash. However, losing the validity document of the money order represents a big problem for whom it was addressed.

a hand holding a check

How to make a draft and bank overdraft?

A bank draft can be made in different ways, either by issuing a check, or by making transactions through non-bank financial entities, such as MoneyGram, where you can verify and track your money transfer.

In order to make an authorized bank overdraft, you must contact an advisor or operator of your bank and reach an agreement where you are authorized to carry out this type of movement under your name, the amount, the period of time to pay and the percentage of commission.

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