Discussion
What are teaser loan rates charged by banks?
Answer: C
Correct answer: Low rate of interest in the initial period which goes up subsequently
A teaser loan carries a low fixed rate for the first year or two and then reverts to the higher prevailing rate, so the borrower's instalment rises after the introductory period ends.
The risk is that eligibility is assessed on the low initial instalment rather than on the one that will follow, so a borrower who can afford the teaser may not be able to afford the reset. That is precisely the pattern the United States subprime crisis exposed, and it is why the RBI raised the provisioning requirement on such loans.
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