Bank Guarantee is a form of promise by the bank on behalf of the buyer and in favour of the seller who provides services on goods or credit.
Here the bank is known as surety, the buyer as an applicant, and the seller as beneficiary. The banks assure the seller, that bank will pay the due amount if the applicant makes to fail payment.
Fixed Deposit is a form of term deposit where a fixed amount of money is deposited in the bank for a fixed period and is repayable at a future date, along with the interest earned.
Fixed deposit is offered both by banks and non-banking financial companies.
Key Takeaways
- A Bank guarantee is a form of financial security issued by a bank to guarantee the payment or performance of a contract. At the same time, a fixed deposit is a savings account that earns a fixed interest rate over a set period.
- A Bank guarantee is often used in business transactions to assure parties that a contract will be fulfilled, while fixed deposits are a common investment option for individuals.
- Bank guarantees and fixed deposits involve working with a bank to manage finances, but they serve different purposes and benefits.
Bank Guarantee vs Fixed Deposit
A bank guarantee is an oath by a bank to pay a fix amount of money to a beneficiary if the party that requested the guarantee fails to fulfill their contractual obligations. A Fixed Deposit (FD) is a financial tool provided by banks, where customers deposit a lump sum of money for a fixed period.
Comparison Table
| Parameter of Comparison | Bank Guarantee | Fixed Deposit |
|---|---|---|
| Concept | Bank Guarantee is a promise of payment by the bank to the seller on behalf of the applicant. | A scheme in which money is deposited in the bank for a fixed period. |
| Objectives | It allows the individuals, to acquire goods, buy equipment’s and take loans. | The objective is to facilitate investors, then deploy idle savings and earn interest. |
| Payment | Payment is made on the failure of commitment. | Payment is fixed for a particular period but is repayable at a future date. |
| Suitability | Bank Guarantee is especially suitable for government contracts. | Fixed Deposit is especially suitable for individuals who are doing jobs, business, or even investors. |
| Advantage | Based on bank guarantee, security is provided to the applicants to make the payments for goods and services on later stages. | It enables the depositor to earn higher returns on his funds. |
What is Bank Guarantee?
Bank Guarantee is a form of promise by the bank on behalf of the buyer and in favour of the seller who provides services on goods or credit. Here the bank is known as surety, the buyer as an applicant, and the seller as beneficiary.
The banks assure the seller, that bank will pay the due amount if the applicant makes to fail payment.
Based on bank guarantee, security is provided to the applicants to make the payments for goods and services on later stages. The liability if the bank guarantee is of secondary level.
Bank Guarantee is only offered by the banks and no other firm or organization.
The risk factor, here, is more for merchants and less for the banks. This becomes active only when the applicant is not able to an amount of money to a seller.
How Do Bank Guarantees Work?
- An applicant demands a loan from a seller.
- While applying for the loan, the applicant and the seller decides that a bank guarantee is important.
- Applicant than requests the bank to give a bank guarantee for the loan taken for the seller.
- Then, the bank guarantee is provided in the favour of the seller who provides services on goods or credit and a guarantee of the applicant/buyer.
There are two types of bank guarantee:
- Financial Guarantee
- Performance Guarantee
What is Fixed Deposit?
Fixed Deposit is a form of term deposit where a fixed amount of money is deposited in the bank for a fixed period and is repayable at a future date, along with the interest earned.
A Fixed Deposit account is called so because here, the depositor has to invest the money only once in a whole sum when the fixed account is opened and it is given back along with interest once the fixed time is over.
Fixed Deposit just requires a single time investment.
A fixed deposit produces higher returns. Its Tenure ranges from 6 days to 11 years. If we invest in Fixed Deposit we can save and earn money both at the same time.
Fixed Deposit is especially suitable for individuals who are doing jobs, businesses, or even investors. Fixed deposit is offered both by banks and non-banking financial companies.
Main Differences Between Bank Guarantee and Fixed Deposit
- Bank Guarantee is a form of promise by the bank on behalf of the buyer and in favour of the seller who provides services on goods or credit whereas Fixed Deposit is a form of term deposit where a fixed amount of money is deposited in the bank for a fixed period and is repayable at a future date, along with the interest earned.
- The objective of Bank Guarantee is to allow the individuals, to acquire goods, buy equipment’s and take loans whereas the objective of the Fixed Deposit is to facilitate investors, then deploy idle savings and earn interest.
- Bank Guarantee enables individuals to postpone payment for goods or services obtained based on the security supplied by the bank guarantee whereas Fixed Deposit enables the depositor to earn higher returns on his funds.
- There is no need of any kind for investment in Bank Guarantee but Fixed Deposit requires a single time investment.
- Bank Guarantee is only offered by the banks and no other firm or organization whereas a Fixed deposit is offered both by banks and non-banking financial companies.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
