Money Banking

Why is the offering of "teaser loans" by commercial banks a cause of economic concern?

  • 1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed to the risk of defaulters in future.
  • 2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units.

Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer

Teaser Loan is an adjustable-rate mortgage loan in which the borrower pays a very low initial interest rate, which increases after a few years. Teaser loans try to entice borrowers by offering an artificially low rate and small down payments, claiming that borrowers should be able to refinance before the increases occur. 

Teaser loans are considered an aspect of sub-prime lending, as they are usually offered to low-income home buyers. Unfortunately, when these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages. This leaves borrowers with increased monthly payments, which many cannot afford. This method of loaning is considered risky, as default rates are high.

The correct option is A.