TD Explains: How do bank drafts work?

Basically, treat bank drafts like cash. These are useful when you need to make a payment with guaranteed funds and commonly used, for example, when paying a legal settlement or making a large purchase for a home or vehicle.

Unlike a personal cheque, a bank draft is guaranteed by the financial institution, so the person to whom the bank draft is payable is sure to receive the amount on the draft.

A bank draft can't be cancelled once it has been delivered to the person it's for. If you lose the draft before you have been able to deliver it, you can replace the lost draft if you are the purchaser but you may have to sign an indemnity or provide a surety bond from a licensed insurance company before the draft is replaced.

How bank drafts work:

1. When you ask to purchase a bank draft, the funds are immediately withdrawn from your deposit account.
2. These funds are put into the bank's reserve account until the bank draft is presented for payment.
3. As the purchaser of the bank draft, you are responsible for delivering the bank draft to the payee.
4. Once the bank draft has been deposited by that individual or entity, their financial institution may still put a hold on the funds until the bank draft clears the payments system.