CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
If you’re wondering what a bank guarantee is, it’s a guarantee whereby a third party (usually a bank) commits to pay if the primary debtor defaults. The bank does not disburse funds immediately, but assumes the responsibility to do so if the guaranteed party fails to meet its obligation.
What a guarantee means in practice: a payment backup. The bank assesses the applicant’s creditworthiness and, if approved, issues a document guaranteeing fulfillment of the obligation to a third party. In exchange, the applicant pays fees to the bank. If there is no default, the guarantee is canceled without any payment.
Understanding what a guarantee is in its full context requires looking at its applications beyond a single sector. Bank guarantees arise in various situations.
The most well-known use. The landlord requires the bank to guarantee the tenant’s payments to ensure the monthly rent will be collected. If the tenant fails to pay, the landlord makes a claim against the bank.
Companies submit guarantees to participate in public tenders or to ensure compliance with contracts. The guarantee demonstrates financial capacity without tying up capital.
The process follows a standard sequence at most financial institutions.
Request the guarantee from the bank. The customer describes the transaction that needs to be guaranteed.
Credit analysis. The bank reviews income, payment history, and available funds.
Approval and signing. If the profile is favorable, the bank issues the guarantee document.
Payment of fees. The customer pays application, origination, and periodic maintenance fees.
Once issued, the guarantee remains active until the obligation is fulfilled or the term expires.
A tenant needs a guarantee of 3,000 EUR (six months’ rent at 500 EUR). The bank charges 1% per quarter on the guaranteed amount, 30 EUR every three months. It also charges a 150 EUR origination fee. For a one-year contract, the total cost of the guarantee is 150 + 120 = 270 EUR. If the tenant pays all monthly installments, the guarantee is canceled without the bank having to pay anything.
Many applicants sign without understanding the actual costs or obligations. These misunderstandings occur frequently.
Failing to calculate the total cost of accumulated fees.
Assuming the guarantee is free if there are no missed payments.
Forgetting to cancel the guarantee when the lease ends.
The third mistake is more common than it seems. An unpaid guarantee continues to generate fees and appears as an active risk on your financial profile.
If you’re looking to understand what a bank guarantee is and when it’s advisable to use one, these are the situations where it adds value.
Securing a rental without a large cash deposit.
Participating in bids without tying up capital.
Demonstrating creditworthiness to third parties in a verifiable manner.
Understanding the leverage of a guarantee relative to its cost helps you decide whether it is worth it. In many cases, it’s cheaper than tying up cash.
A bank guarantee is a form of security where the bank stands in for you if you fail to meet a payment obligation. It incurs actual costs in the form of fees, even if it is never called upon. Before applying for one, calculate the total cost and compare it with other available guarantee options.