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Banking Concept: What is Teaser loan ??

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What is a Teaser Loan?

If a bank offers a slightly lower rate in the initial years and higher rate in later years, it is called a teaser loan.

For this type of loan an introductory rate is offered. It is an interest rate charged to a customer during the initial stages of a loan. This rate, which can be as low as 0%, is not permanent. It has an expiration after a specified period of time.

Under the ‘teaser loan’ offer a bank charges lower interest rates for the first two or three years and later on from the fourth year the interest rate will automatically get reset to the then prevailing base rates.

For example, during 2010 State Bank of India offered 8 per cent rate of interest for the year and 9 per cent for the 2{+n}{+d}and 3{+r}{+d}year and assured of linking the rate to the base rate from the 4{+t}{+h}year onwards. The concept of teaser loan would also mean that the first couple of years the loan would be on fixed rate basis and eventually it gets converted to floating rate basis.

How it works

From a bank’s point of view though this could mean a strain on their profits, these type of strategies has worked positively for them which lures a customer who would be reeling under the raising loan rates and any sops like these would bring them to the bank’s premises.

From the customer’s point of view, a teaser loan can be a good beginning of a long term loan commitment for a customer because in a raising interest rate regime getting a loan sanctioned at a discount for the first couple of years makes a lot of sense.

But, why RBI is against it?

Because RBI sensed following implications with Teaser Loans:-

(a) The target segment for the banks is the low-income home buyers who are allured by the enticement by the banks. They would pay the first few years of the loan installments properly and eventually if there are any disturbances in the economy that could affect their jobs and/or income earning capacities the defaults could begin and in due course the entire banking system could be in disarray.

(b) The other obvious target are young people who would have just started their earning life, newly married and are looking to own a house (the biggest dream of a middle class family).

(c) RBI sensed an impending housing loan bubble on the lines of sub-prime that shattered the world financial system in 2008 and began issuing guidelines to banks on such offers (teaser loans