Key Difference: Pay order and demand draft are basically used for the same purpose, but are different from each other. A pay order is a mode of payment that is to be cleared in the very specific branch of the bank that issued it. Demand draft is a mode of payment that gets cleared in any branch of the issuing branch.

Pay Order and Demand Draft are the instruments for which the value is already received by bank.

Pay order is also called as banker’s cheque. Pay order is not a Negotiable Instrument. A negociable instrument is a document that guarantees the payment of a specific amount of money from one person to another. It is a transferable, signed document that promises the payment of the amout on demand or at a specific time. 

A pay order is payable on the issuing bank, that is they are applicable for payment within the city and if it is once made, a person cannot cancel the pay order if the party is in any other city. It is basically issued for local use and is payable only in that particular town.

The definition of pay order is a “document which instructs a bank to pay a certain sum to a third party. Such orders are normally acknowledged by the bank which provides a guarantee that the payment will be made.”

On the other hand, a demand draft is an instrument used for transfer of money in a particular place. It is a Negotiable Instrument. Demand draft is issued by a bank and is drawn by one branch of a bank on another branch of the same bank. In a demand draft, both the drawer and the drawee are the same persons from the same bank. A Demand Draft has not precisely defined in the Negotiable Instrument Act. A demand draft cannot be dishonored. There is a certainty of the payment in the case of a demand draft. The payment of the demand draft cannot be stopped if once it is sent. A demand draft is always payable in order for a certain purpose.

Demand Draft, also known as DD, is prepared by a banker and it is signed by a banker, so the chances of default are not there. It is not mandatory that one should have a bank account in the bank from where he is preparing the demand draft.

There are times if someone wants to send money to the party who is out of station, so he needs to get a demand draft made in his favor. Let’s use the example of Ben. Ben needs to submit money in the college as soon as possible for appearing for an exam; the college requires a small amount of money through demand draft. Why do they insist for a demand draft? The reason is simple, firstly college may not have time to wait for Ben’s cheque to clear and secondly, there is no assurance that Ben's cheque will get cleared or not.

Thus, in pay order and in demand draft, the advantage is that these instruments are prepaid. It can be paid by depositing it in the bank, or the amount is reduced from your bank in favor of the third party for the desired amount.

The key differences are listed in the table below:

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