A common bank check is a negotiable instrument. When the payer crosses it with the wording “non-negotiable’, it is converted into a non-negotiable instrument.
It cannot be used for any financial transaction and is often used as a sample form of payment.
Let us discuss what a non-negotiable check is, how it is issued, and what some other forms are related to it.
What is a Non-Negotiable Check?
A non-negotiable check is a type of check that cannot be transacted. It means the holder of this check cannot take cash, transfer money, or deposit it into the account.
This check differs from other non-negotiable instruments like a banker’s check. A banker’s check can be deposited into the account or cashed by the holder.
On the other hand, a non-negotiable check cannot be used for any financial transaction. Issuers do not need any special format or template to issue this check.
Often these checks are issued as a form of security or a sample for the receivers. For instance, an employer may issue a simple check to its new employee and cross it with the words “non-negotiable”.
This check would then serve as a sample payment for the employee while the actual salary would be transferred directly to the account.
How to Issue a Non-negotiable Check?
Issuing a non-negotiable check does not require any specific procedure. You can convert any check into a non-negotiable check easily.
Once you write the check as you normally do, you’ll have to write the words “Non-negotiable” or “Not Negotiable” on the same check prominently.
Often, these words are written between two lines on the left top corner of the check. However, you can also write these words at the center or below the wording lines.
Remember, once you write these words and the check is converted into a non-negotiable instrument, it cannot be altered.
Also, this check will not be usable by the holder after conversion.
Negotiable v Non-Negotiable Checks
By default, a check is a negotiable instrument. A check can be exchanged for cash, deposited into an account, or transferred to any other person.
For example, when a check holder visits a bank, the check can be deposited into the account holder’s account or exchanged for currency.
Similarly, an account holder can issue a check to any other person by simply writing the receiver’s name.
In short, a negotiable check or a simple check can exchange hands and ownership. On the other hand, a non-negotiable check cannot transfer the ownership nor be used for any transaction.
Thus, a non-negotiable check is not usable in practice. This is why it is rarely used in practice.
Other Forms of Checks
A bank check can be primarily negotiable or converted into a non-negotiable one. Then, there are some other similar forms of checks as well.
Bearer and Order Checks
A bearer check is a simple check you’ll come across daily. Once the issuer signs the check, the bearer (holder) of the check will be entitled to the payment.
Order checks are issued by name to the payee. The payer will need to authorize it through signatures.
A crossed check can only be deposited into the account of the payee. The payee’s name will be written on the check and cannot be altered.
If the check is not crossed with lines or “non-negotiable” words, it will be called an open check. This type of check can be issued to any person and the holder of the check can get cash against it.
When the payer puts a future calendar date on the check, it becomes a post-dated check. It means the check can be used on the particular date written on it even if it is presented to the bank immediately.
Traveler’s checks are a form of money orders or drafts used by travelers. These checks can be made in foreign currency as well.
A banker’s check is issued and verified by the bank on behalf of the applicant. The bank will first deduct the balance and then issue the check.
Common Examples of Non-Negotiable Instruments
A simple bank account check can be converted into a non-negotiable instrument. When the issuer writes these words on it, the check will become a non-negotiable instrument.
Similarly, a banker’s check is a type of non-negotiable instrument as this check cannot be transferred to any other person.
Other examples of non-negotiable instruments include government bonds. These bonds are not traded on the secondary market as the bond owner can only redeem them.
Common Examples of Negotiable Instruments
A bank check in its original form is a negotiable instrument. Similarly, many other types of bank checks are negotiable. For example, a traveler’s check is a negotiable instrument.
A bank draft or payment order is a negotiable instrument. Promissory notes and certificates of deposit are negotiable instruments.
Currency is also a common example of a negotiable instrument.
Pros and Cons of Using a Non-Negotiable Check
A non-negotiable check has limited benefits and it also comes with limitations.
It is sometimes used as a form of security or a sample payment instrument by the issuer. For example, employers issue it to the new employees as a sample salary payment with details.
Other non-negotiable checks like a banker’s check are useful to both parties as they ensure payment even if the payer is in default.
Other non-negotiable instruments like contracts and financial securities benefit the issuers as their terms and conditions cannot be altered.
A non-negotiable check cannot be used for a transaction. It cannot be deposited or used to obtain cash. In practice, it has no use.
Non-negotiable checks cannot be used for payments or other financial transactions. Other forms of non-negotiable checks like a banker’s check come with additional costs for the issuer.
Pros and Cons of Using a Negotiable Check
Negotiable instruments have some discrete advantages and disadvantages as compared to non-negotiable instruments.
These instruments are transferable which means they can be used for several types of transactions. For example, this feature can trade financial securities on the secondary market.
These instruments come in a standardized form and can be customized as per the needs of the payer or payee.
Other types of negotiable instruments like contracts include key information about the payee. Both parties sign these instruments for validation.
Negotiable instruments may make it difficult to identify fraudulent activities as the transfer of ownership is easier. The payee may have to pay some additional charges for customization.